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Great things you can do with your TFSA

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think.

Now that we’re into the start of a new year (Happy New Year!) here are some great things you can do with your TFSA.

TFSA Backgrounder

The TFSA was first introduced in the 2008 federal budget.

It became available to Canadians for the 2009 calendar year – as of January 1, 2009. Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.

But the “savings” word in the name is very misleading, no?

Correct. 

Since account introduction in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before.

While this account is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. Consider it like an RRSP account in reverse.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Let me tell you … here is summary of many great account benefits:

  1. Capital gains and other investment income earned inside the account are not taxed.
  2. Withdrawals from the account are tax-free.
  3. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, like future Old Age Security (OAS) income.
  4. Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
  5. While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA. Do it without any income attribution!
  6. TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. More details below for you.
  7. The annual contribution limit is indexed to inflation in $500 increments, that happened in recent years …. and more!

I’ve got my preference for which account I focus on for wealth-building purposes (related to the RRSP vs. TFSA debate, including what account I would suggest you max out your contributions to first) but let’s compare each first:

RRSP

TFSA
A tax-deferral plan. A tax-free plan.
Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution. Contributions are made with “after-tax” dollars.

 
Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate. Contributions are not tax deductible; there is no refund to be had.
If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.
If you make a withdrawal, contribution room is lost. If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.
Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal.  They are treated as income and taxed at your current tax rate. Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.
Since withdrawals are treated as income, withdrawals could reduce retirement government benefits. Withdrawals are not considered taxable income.  So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.
You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year. You can contribute to a TFSA after age of 71.
The Summary:  part of your RRSP is borrowed money (i.e., you owe the government taxation.) The Summary:  all of your TFSA is your money.

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle to focus on first at any income level even though I contribute to both every year. All the money in the TFSA is mine to keep, grow and manage with no taxation withdrawal consequences.

Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:

TFSA contribution limit 2009 to 2025:

Year TFSA Annual Limit TFSA Cumulative Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500
2023 $6,500 $88,000
2024 $7,000 $95,000
2025 $7,000 $102,000
Based on the recent bull run in recent years, I know some individuals that have over $200,000 in their TFSAs.

I also know some couples who have their combined TFSA assets worth more than $400,000 in value.

Pretty impressive tax-free money!!

Q&A with Mark – What has worked for me/us over the years?

Well, we’ve bought various assets, namely Canadian stocks and ETFs over the years.

To date, we have avoided any TFSA withdrawals. Instead, like I referenced above, we use our TFSAs for owning equities and wealth-building purposes.

Q&A with Mark – What types of investments can you own inside the TFSA?

Thankfully lots!

Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings. You can own a number of different types of investments inside the TFSA: Continue Reading…

Your Free Playbook to Retirement Income Planning

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

There’s a lot to think about when it comes to achieving your retirement goals.

I know. 🙂

I think about it a lot. I write about it a lot.

Better still, I’m planning for our retirement income needs just around the corner.

As we all know by now, personal finance is forever personal.

You need to develop a strategy and retirement income plan that works for you. Nobody else will do.

Read on to learn about the key steps I’m taking and what key steps might apply to you as well. I hope you enjoy this free playbook to retirement income planning.

No course fee required. 🙂

Your Free Playbook to Retirement Income Planning

“Drawing down one’s savings in retirement is something very few retirees do well, even with the help of professional advisors.” – Fred Vettese, Retirement Income for Life.

A general retirement preparation rule suggests that retirement income should be about 70%-80% of your annual earnings.

Well, rules are made to be broken.

In some cases, these expert rules of thumb won’t apply to you at all!

Forecasting your future financial needs can be complicated – a puzzle that needs to be deconstructed and put back together.

That said, I believe there are two-major steps involved in retirement income planning and then a third for good measure:

Step 1: What are your spending goals?

Step 2: What are your investment savings and income sources to meet those needs?

Beyond that, you’ll want to consider a third step in my opinion:

Step 3: What is the bare minimum lifestyle that you’re ready to live?

With those key questions/steps to answer, here are our answers to these key steps I’m working through as part of my retirement income planning this year, for next year in 2025.

Step 1: What are our spending goals?

Step 1 is always first.

Some Canadians can live off a little.

Some Canadians want to live off a lot.

Your income needs and wants in semi-retirement or full retirement or whatever you want to call the next phase of your life will forever be personal and up to you.

A past headline that got a lot of retirement planning attention was this BMO study and its findings.

“BMO’s 13th annual Retirement Study reveals Canadians are prioritizing retirement savings as both contributions and account holdings have increased from the previous year. The study found that Canadians believe they will need $1.7 million to retire, up 20 per cent from 2020 ($1.4 million). However, fewer than half (44 per cent) of Canadians are confident they will have enough money to retire as planned, a 10 per cent decrease from 2020.”

Do you need $1.7 million to retire?

You might.

It is my conclusion most won’t need that much.

Here are the questions we’ve answered on this subject, to figure out what we need and want related to our spending goals:

  • How much do we wish to spend, annually, on average in retirement and starting when?
  • Do we see us working part-time or not at all?
  • Do we wish to have any “go-go” spending years/higher spending years in early retirement years vs. later retirement years?
  • How might inflation or other factors impact our savings?
  • Do we have any capital expenses in retirement – like newer cars every 10 years?
  • Do we care to leave any estate? If so, how much?
  • Are we prepared to change our lifestyle if needed?

I’ll link to all our answers to these questions later in today’s post with some articles for reference. 🙂

Step 2: What are our retirement income sources to meet those needs?

Just like planning a trip, once you figure out where you want to go you’ll need to figure out how to get there: what components are part of your trip.

As a starter for our retirement income planning considerations, I looked at these components: Canada’s retirement income pillars and what income might be available from each pillar and when:

  • Pillar 1 is the Old Age Security (OAS) pension and its companion program, Guaranteed Income Supplement (GIS) – age 65. 
  • Pillar 2 is the Canada Pension Plan (CPP) – starting age 65 or ideally later. 
  • Pillar 3 includes your mix of tax-assisted vehicles such as Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and other accounts – starting in our 50s. 
  • Pillar 4 includes other assets accumulated over your lifetime such as your primary residence, vacation property (if you are lucky to have one), or stocks held with your brokerage firm in a taxable account – starting in our 50s. 

In Step 2, we basically listed all our available income sources and the potential timing of those income sources along with other considerations you might wish to review as well:

  • Maximize your Registered Retirement Savings Plan (RRSP). If you have unused RRSP contribution room from previous years, take advantage of the ability to “catch up” your contributions.
  • Eliminate debt. I believe servicing debt eats into your available income when you’re retired – we won’t have this problem since we intend to enter semi-retirement remaining debt-free.
  • Consolidate your investments. Consolidating your assets under one financial roof should make it easier to manage and diversify your portfolio and it could reduce your overall investment costs too.
  • Make your portfolio as tax-efficient as possible. Are you paying more to the government than you have to? Different types of income are taxed in different ways. Too much interest income, which is fully taxable in a taxable accont should be avoided beyond an emergency fund while capital gains and Canadian dividends receive preferential tax treatment when held in a taxable account. You should also strongly consider maxing out your TFSA with equities as well = tax-free growth. 🙂
  • Company pension(s). We have been fortunate enough to have x1 defined contribution (DC) and x1 defined benefit (DB) pension plan in our household – so we use those account values and income estimates in our retirement income planning at certain ages. For us, the DC will come online at age 55. The DB is likely to come online at age 65.
  • Inheritance/family estate. Is that in your financial future at all? “Bonus money” if so?
  • Part-time or hobby work. We have also considered the option to work part-time here and there not only for hobby income for travel but also to keep your minds busy and remain socially active too.

You might want to consider creating a retirement income map that breaks down your income sources every 5-years or so. Here is mine:

Our Retirement Income Map - March 2024

I’ll highlight our three (3) key early retirement income sources later in the post as well.

Step 3: What is our bare mininum lifestyle – could we scale back?

Through basic budgeting, I know our base – what our day-to-day living costs are with some buffer built-in.

Using this information, I know what we need to earn at age 65 to enjoy retirement with.

Our retirement income plan has that covered with a few income sources listed above including government benefits such as CPP and OAS in our future at age 65.

My problem and opportunity is, I don’t want to wait that long until age 65. 🙂

Maybe the same applies to you.

Life is short. Time is precious. Work on your own terms is better than needing to work.

I’ve recently heard from one blogger that it’s quite easy to spend less in retirement – just assume you will. You will take off-peak vacations as an example. I think that’s flawed thinking. You don’t always want to spend less in retirement. There could be bucket-like trips or other purchases you’ve waited your entire life to take.

A good solution is to figure out your Coast FIRE number.

With Coast FIRE:

  1. While you expect your retirement assets to grow as you reach a final retirement date, the good news is,
  2. Based on the assets you have, you don’t really need to save any more money for retirement = you are financially coasting to your retirement date. This is because existing income (full-time, part-time, hobby income, occasional work) or whatever work that is covers your key expenses until you reach your final retirement date.

Another option is Barista FIRE.

I would advise just like looking at your spending goals related to what you want to spend, you should also look at your bare bones budget and determine what you must spend. That’s your floor. That’s your starting point. Coast FIRE or Barista FIRE could be add-on solutions.

I’ve linked to this fun Coast FIRE calculator here and I’ve also listed this calculator amongst other FREE stuff on my Helpful Sites page.

Your Free Playbook to Retirement Income Planning

Before my answers I promised above here are a few other factors to consider:

  1. Time – Do you have a lot of time to save for retirement? i.e., are you saving later in life?
  2. Diversification and risk and liquidity – As good as any one stock performs in my portfolio, some are up over 40% this year (!!) it’s probably never a good idea to put all your retirement eggs in the same basket. What goes up could go down…  I’ve always believed that any near-term spending within the next 1-2 years should likely be in safe cash or cash equivalents and not equities. Again, your mileage may vary.
  3. Inflation – To help ensure that your spending power is retained, you need to factor in the rising costs of goods and services. Ensure you include higher spending / inflation factors as you age. I’ll tell you mine below.

Our Playbook to Retirement Income Planning

Inspired by readers that wanted to know more, here are our answers to the questions above:

1. How much do we wish to spend, annually, on average in retirement?

Our desired spending for our first year of semi-retirement is in the range of $70,000 – $75,000 per year (that means after-tax).

As part of our retirement income assumptions we use the following that might be helpful to you as well:

  • 5% annualized rate of return i.e., over the coming decades from RRSPs/RRIFs, TFSAs and Non-Registered Accounts. Historically, we’ve earned much more than that but I like to be cautious.
  • 3% sustained inflation. I personally wouldn’t go any lower than 2.5%.

2. Do we see us working part-time or not at all?

Yes, part-time for sure.

I have personally anticipated I will continue working at something here and there after full-time work is done but the need to work however to meet our desired spending is now optional and therefore no longer required as of this year. Continue Reading…

Big tax tips for small business owners

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Image by Pexels: N. Voitkevich

By Aurèle Courcelles, CFP, CPA

Special to Financial Independence Hub

Small businesses play a sizeable role in shaping Canada’s economy, contributing significantly to national employment numbers and our country’s gross domestic product (GDP).

According to Statistics Canada, in 2022 businesses with 1 to 99 employees made up 98 per cent of all employer businesses in this country. But today’s economic environment has triggered new financial challenges for this cohort. Canadian entrepreneurs can help offset the cost of rising inflation, rising cost of inputs, and rising interest rates, and keep more money in their pockets, by adopting some or all of these key tax strategies.

Consider employing your immediate family

Income splitting, whereby the higher-earner transfers part of their income to a lower-earning family member, can reduce the tax owed by your household. Consider paying a reasonable salary to your spouse and/or children for the services they provide for your business to reduce your tax obligations.

Incorporate your business

If your business generates more profit than you need to live on, incorporation is a highly effective tax strategy. It could lead to a significant tax deferral by qualifying for the lower small business tax rate for active income – the longer the profits are left in the company, the larger the tax deferral. If shares of the business are ultimately sold and are eligible for the lifetime capital gains exemption, the tax deferral gained through incorporation can create a permanent tax saving.

Other potential advantages of incorporation include having family members own shares (so as to have access to multiple capital gains exemptions) and possibly paying out dividends to actively participating family members who are taxed at a lower rate.

Maximize tax breaks with registered plans

Consider your RRSP contribution room when setting and reporting remuneration for services provided by yourself and family members who also work in the business. Employment income creates RRSP contribution room for the following year which, for 2024, can represent up to $31,560 of room. RRSP contributions are tax deductible, provide tax deferral and allow for business owners to diversify their future retirement income.  Contributing to a tax-free savings account (TFSA) can also work in your favor by allowing you to withdraw funds if needed without penalty. Continue Reading…

5 financial tips for Back-to-School season

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By Aaron Hector, Private Wealth Advisor, CWB Wealth

Special to Financial Independence Hub

Back-to-school season can raise tough conversations about financial responsibility. For many, it causes students and families to re-evaluate both short and long-term goals in the pursuit of a post-secondary education.

The good news is that creating a plan to manage school expenses doesn’t have to be difficult:  it just requires students and families to look ahead and be realistic with budget, goals and expectations. In other words, this isn’t a process to “wing it.” Using a scenario in which you have a student enrolled or planning to enrol in a post-secondary program, here are five tips that will can help keep your finances on track this year.

Work smarter, not harder: Develop your school savings plan

It’s never too early to start saving for your child’s education. If you are a first-time education saver and starting to put money away, be sure to learn about opportunities that fit your needs and goals: whether that is saving smaller amounts over longer periods of time or leveraging options like a Tax-Free Savings Account (TFSA) or a Registered education savings plan (RESP).

For example, all new parents should start a RESP, which is a tax-sheltered investment vehicle that provides access to government grants which provide a 20% match on your contributions (up to certain limits). The first step is to speak to your advisor to learn about your options. The options are vast and more flexible than most people assume!

Leverage your resources: find out how your bank and school can help you save

To ease the burden of pricey tuition, it pays to do a bit of research on the programs, grants, or scholarships you or your child might be eligible for through your financial and post-secondary institution. The resources are out there, but it can be tough to know all that exists or how to apply for them. A good advisor can help with this part – in fact, you should be able to count on their help and resourcefulness for your entire financial journey.

Do your homework: Build a budget

Between school supplies, courses, commuting and school fees, a back-to-school shopping list can feel daunting, endless and expensive. Find savings by teaming up with your kids to identify which costs are needs versus luxuries, and then prioritize or cut as need be. Use what you’ve spent in previous years as a baseline to create a budget for the current year, adjusting for any new or increased costs you expect to come up. Because budgets can be quickly impacted for unexpected costs, consider a back-up fund. Tracking your spending, spreading out purchases, buying in bulk, reusing items and investing in supplies that are quality (not just trendy) will help you properly manage that budget for years to come.

It’s your (financial) responsibility: Manage your money with the proper mindset 

For many, there are at least two life pivotal transitions that take place after graduating high school: entering the world of post-secondary education, and (more importantly) taking on a more mature financial mindset. This is a great time to encourage kids to open their own TFSA, or even a First Home Savings Account (FHSA). While the TFSA can be used for shorter term financial goals, the FHSA should really only be used for money that is being set aside for a housing purchase within the next 15 years. Encouraging your children to form good financial habits today will prove to be very powerful over the long term.

Knock. Knock: Don’t forget to check in

You’re already likely to keep tabs on your children throughout the year to make sure they are staying on top of their laundry and homework, but some parents might forget to check-in with their own financial advisor. Meeting regularly with your advisor helps to:

  • Manage budget changes in real-time as your family’s expenses and priorities shift
  • Keep your finances on track by reviewing whether you are staying on target you’re your financial goals

The cost to attend a post-secondary institution can be massive, and the price tag can become even harder to cover without the right plan. So start early. Save for the long-term. And lean on the advice and tools that only a good financial advisor can provide. You – and your future student – will be thankful for being proactive.

To learn more about setting you and your kids up for financial success visit www.cwbwealth.com

Aaron Hector is a Private Wealth Advisor with CWB Wealth where he has been for the past 16 years. In his position he works with clients in a financial planning capacity. The majority of his clients are of an ongoing long-term nature, but he also prepares financial plans on a fee for service basis for those who are more interested in a one-time financial planning engagement. He is the Symposium Chair and board member for the Institute of Advanced Financial Planners (IAFP) and a member of the Financial Planning Association of Canada (FPAC).

 

More on the FHSA [Tax-free First Home Savings Account]

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The FHSA and reasons why younger Canadians should really opt in to opening this account with any intention to buy their first home over time …

By Mark Seed, myownadvisor
Special to Financial Independence Hub

The New Tax-Free First Home Savings Account (FHSA) Facts:

  • Think of the FHSA as a hybrid of the Registered Retirement Savings Plan (RRSP) / Home Buyers’ Plan and Tax-Free Savings Account (TFSA): FHSA contributions are tax-deductible like the RRSP and qualifying withdrawals out of the account are not taxed just like the TFSA.
  • To be eligible to open and contribute to your FHSA you must be:
    • A Canadian resident + 18 years or older + *a first-time home buyer. (Meaning, existing homeowners AND folks that owned a home in the *last four preceding years of trying to open the FHSA won’t qualify to open this account).

*An individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home (or what would be a qualifying home if located in Canada) that either (i) they owned or (ii) their spouse or common-law partner owned (if they have a spouse or common-law partner at the time the account is opened).

  • The FHSA can hold stocks and bonds and ETFs just like the TFSA and RRSP.

FHSA Contributions and Tax Deductions:

  1. Individuals would be able to claim an income tax deduction for FHSA contributions made in a particular taxation year; contributions currently capped at $8,000 per year up to a $40,000 lifetime contribution limit. So, a solid 5-years of striving to max-out the account for tax-free withdrawals.
  2. Like the TFSA, your unused FHSA contribution room can be carried forward to the following year but only up to a maximum of $8,000.

FHSA Holding Period and Withdrawals:

The account can stay open for 15 years OR until the end of the year you turn 71 (not very likely???) OR until the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.

FHSA worst-case? What if you open an account and you don’t purchase a home??

Any savings not used to purchase a qualifying home could be transferred to an RRSP or RRIF (Registered Retirement Income Fund) on a non-taxable transfer basis, subject to applicable rules. Of course, funds transferred to an RRSP or RRIF will be taxed upon withdrawal.

All that and more, is highlighted in this comparison graphic below via @AaronHectorCFP and more details from Cut The Crap Investing with even more Q&A.

Weekend Reading - The New Tax-Free First Home Savings Account (FHSA)

Reference/Source: https://cutthecrapinvesting.com/2023/03/01/the-tax-free-first-home-savings-account-in-canada-fhsa/

My FHSA Thesis

Overall, pretty great stuff with the FHSA and a major opportunity for younger investors who are really trying to find ways to sock away more money for their very first home.

Continue Reading…