Now that
RRSP season is officially over, I want to write about the Tax-Free Savings
Account (TFSA). This account is one topic that I discuss with pretty much
everyone I meet, as it can have a huge financial impact especially at
retirement. Unfortunately, some investors are not aware how to maximize
the tax savings potential. I will explain this in a moment, but first I
want to explain how a TFSA works.
When you
contribute to a TFSA it differs from a RRSP as you do not receive a tax receipt
for the contribution, you do not claim it on your taxes, and you do not get a
tax refund. The money initially invested is with after tax dollars (no
tax savings there). The tax savings is in the growth.
Below,
you will find a quick comparison chart between RRSP and TFSA:
|
TFSAs |
RRSPs |
Contributions |
Not tax-deductible |
Tax Deductible |
Withdrawals |
Tax-free - Withdrawals are added to contribution
room effective the following year
|
Taxed – Withdrawals are not added to contribution
room
|
Earned Income Requirement for Contribution Room |
Contribution room is not based on earned income. |
Contribution room is based on earned income. |
Age Requirement for Conversion/Collapse |
There are no conversion requirements for TFSAs. |
A RRSP must be converted to a Registered
Retirement Income Fund (RRIF) or annuity at age 71.
|
Any
withdrawals from a TFSA will not only be tax-free but will also not interfere
with any government income-tested benefits and credits you may be
receiving.
In order
to maximize the tax savings, you should:
- invest this account to achieve the most growth
- and you should also give it time for the growth to accumulate.
Source:
getsmarteraboutyourmoney.ca
Above you
will find TFSA illustration of an initial contribution if $5,500.00 plus your
yearly contribution of $5,500.00 earning an annualized interest rate of
5%. The result will be a TFSA worth $199,031.57 after 20 years! The
growth on this investment is $83,531.57
Alternatively,
an investment earning 1% per year
would be worth $127,875.87 with growth of $12,375.87.
If you
don’t have a TFSA now, then open one and start contributing today. Don’t
put it off because you feel you don’t have a large amount of money to
invest. Set up an automatic contribution either monthly or per pay
period, and it will surprise you how it will build up over time. Trust
me, you’ll be glad you did!
********************
Gilda
Saunders is a Certified Financial Planner professional at Credential Financial
Strategies Inc. She can be located at:
2 Herald Ave. Millbrook Mall
Corner Brook, NL A2H 4B5
709-634-0405
709-632-9427
709-632-9427
Credential
Financial Strategies Inc. offers financial planning, life insurance and
investments to members of credit unions and their communities. Mutual funds are
offered through Credential Asset Management Inc. The information contained in
this report was obtained from sources believed to be reliable; however, we
cannot guarantee that it is accurate or complete. This report is provided as a
general source of information and should not be considered personal advice or a
solicitation to buy or sell any mutual funds. Please speak to your Credential
Financial Strategies Representative or personal financial representative before
making any financial planning decision or implementing any strategy.