The Regular Guy’s Tax Shelter:
Tax shelters are not just for the rich. The Tax-Free Savings Account (TFSA) is for the regular guy or gal, like you and me. You and I are now allowed to put aside $6,000 a year into a TFSA and while there is no deduction off your taxes, the money does grow tax free inside a TFSA.
Further, you can withdraw from it at any time and pay no taxes when you do so. Contribution limit this year, carried forward, is $63,500, so a couple can put $127,000 into a TFSA. You can take out any amount and put it back in the next year. Keep a good record as over contributions are subject to a one percent per month penalty!
This is different than the Registered Retirement Savings Plan (RRSP) where you get a deduction and do pay taxes when you pull money out.
It’s actually quite a good program for a number of reasons. If you invest in mutual funds that have growth potential and you realize say a 6% rate of return in the long term, all of that growth is tax free, i.e. you pay no taxes on it even if you keep it for 10, 20 or 30 years.
Then when you start an income from your TFSA, it all comes out without any taxes. Further, it does not affect eligibility for any government programs such as Old Age Security (OAS). With an RRSP, all the income is taxed and can cause the government to “claw back” some of your OAS income.
There is no such problem with the TFSA. Some savvy investors are using both. They invest in an RRSP to defer taxes and put the tax savings into a TFSA.
Which should you do? Should you use only an RRSP? Only a TFSA? Or a combination of both? This will depend on your situation and that is what we do here: look at your specific circumstances and make a recommendation as to what is best for you.
One example where the TFSA may make more sense than an RRSP is where a person is young and just getting started in the work force. There income may be lower at this time and therefore the amount of tax deferred with an RRSP is not as much as a mature worker. Often for them, a TFSA is the wiser choice.
If you have not yet had a TFSA vs. RRSP discussion with us, now is a good time.