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Monday, April 23, 2018

Tax Free Savings Account


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!

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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 


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.

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