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By Adrian Mastracci, KCM Wealth Management
Special to the Financial Independence Hub
“Measures from last week’s Federal Budget provided the TFSA a healthy shot in the arm.”
Many investors are wondering whether to pursue a TFSA or RRSP strategy. Quite simply, the TFSA, which started in 2009, complements the RRSP and RRIF.
It need not be an either/or approach.
Wise investors embrace the TFSA in pursuit of long term goals.
We present our TFSA primer:
How the TFSA works
Eligibility:
• Canadian residents, age 18 or older, who have a Social Insurance Number can open a TFSA.
Contributions:
• TFSA contributions can be made in cash or “in kind.” The deemed disposition rules for “in kind” contributions are the same as those for RRSPs.
• Maximum TFSA deposits are as follows:
Year Allowable Deposit
2009 $5,000
2010 $5,000
2011 $5,000
2012 $5,000
2013 $5,500
2014 $5,500
2015 $10,000*
* And annually thereafter.
• The maximum 2015 deposit is $41,000 for those who have not yet contributed to a TFSA. All unused TFSA contribution room can be carried forward indefinitely to future years. Over contributions will attract a 1%/mo penalty.
Withdrawals:
• You can withdraw funds from the TFSA at any time on a tax-free basis for any purpose. However, understand the plan withdrawal fees that may apply.
• The amount withdrawn can be re-deposited into the TFSA in a future year without impacting your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect eligibility for federal income-tested benefits and credits. Such as age credit and the OAS clawback.
How the TFSA is different from the RRSP
• An RRSP is primarily a savings vehicle for retirement. The TFSA can be used for practically everything. Both plans offer advantages, but they have key differences.
• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA contributions are not deductible.
• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will be tax-free.
What happens on death or marriage breakdown
• TFSA assets can be transferred to a surviving spouse’s TFSA without affecting the spouse’s contribution room. Alternatively, an individual can name a spouse as the successor TFSA account and maintain tax-exempt status.
• In case of a marriage or relationship breakdown, TFSAs can be transferred tax-free between spouses or common-law partners without affecting the recipient’s TFSA room.
• TFSA beneficiaries include children who can receive estate distributions tax free. RRSP estate distributions to the same children would attract income taxes.
Benefits of saving in a TFSA
• TFSA contributors will enjoy additional benefits as compared to saving in an RRSP or cash account. Capital gains and other investment income earned in a TFSA is not taxed.
• Draws from a TFSA can be used for any reason. The full amount of withdrawals can be re-deposited into the TFSA in a future year. Only LLP and HBP withdrawals can be put back into the RRSP.
• TFSA deposits make desirable saving tools, say an emergency fund, particularly in years of lower incomes. The RRSP contributions make more sense during higher income years.
• TFSA deposits have no age limit. RRSP deposits end at age 71, unless there is a younger spouse.
TFSAs and RRSPs are both very useful saving vehicles, for different reasons.
Understanding the differences helps make better TFSA and RRSP decisions.
Adrian Mastracci, MBA, is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios.
