Creative Planning with Your Tax-free Savings Account (TFSA)
By Adrian Spitters, FCSI, CFP, FMA and Win Wachsmann. What do you think of when you see the word “creative” in conjunction with the words “money” or “taxes?” A “shady” accountant with a green visor? A new way to stiff the government? More ways to keep more of your money?
It seems that occasionally the government does something creative and right. The Tax-free Savings Account (TFSA) is one such program.
Originally conceived by former Revenue Minister Garth Turner, it was later introduced by Conservative Minister of Finance Jim Flaherty in 2008, after Turner left politics.
It’s a very simple program – really! If you are older than 18, you get one and you get one and you get one.
Every year starting in 2009, you contribute $5000 (or $5500 in 2013, 2014) That means that even if you haven’t contributed previously, you can contribute $31,000 as of 2014. And you can catch up on any missed contributions – at any time.
Unlike Registered Retirement Savings Plans (RRSPs), your contribution is not based on income. The money in the TFSA is also not tax deductible – it’s after tax money.
Even retiree’s can put money into TFSAs.
TFSA’s are an investment and estate planning account that operate in addition to your RRSP and Registered Education Savings Plan (RESP).
Does $5500 seem like too much money to contribute? We’re talking $100 a week. Less than a tank of gas for that pickup or SUV.
Then you grow the money using judicious investments. A TFSA can hold any investment that is RRSP eligible. This includes stocks, bonds, mutual funds, Exchange Traded Funds (ETF), Guaranteed Investment Certificates (GICs), Real Estate Investment Funds (REITS) and even cash (of any country).
You can expect an annual rate of return of at least 7% on your money. The equity markets have averaged 7% over the past 30 years, so 7% is a reasonable annual growth figure.
When you retire, all that money – principal and interest is yours tax free. That’s right yours! Tax free!
It’s also not added to your taxable income. That means it won’t reduce your pension (OAS and GIS) benefits at all!
TFSAs can also be used for income splitting, thus adding one more creative tool to your investment tool chest.
One more creative element of TFSAs is that you can make tax free withdrawals at any time. Want to replace the withdrawal? Just wait until the next tax year and in it goes again.
So what are the numbers you ask? Garth Turner of www.greaterfool.ca gives this example in his own inimitable way:
“Let me give you an example. If you’re 30 years old, stunned, and have never opened a TFSA, what can you expect? Well, if you put in the maximum $5,500 this year, and kept it up for the next three decades, and earned the same average as the TSX has given for the past 30 years (7%), then you’d retire at 65 with $819,000 in the TFSA. This would be equivalent to an RRSP with $1.1 million in it.
If the TFSA threw off 7% returns after that, you’d have $57,300 a year in completely tax-free income. Add in your CPP and OAS, and suddenly you’re enjoying $75,000 in annual income, and paying $0 in tax. Oh yeah, and you’d still have $819,000.
Now, if you stuck with the GIC thing for 30 years, your TFSA would be worth $285,900 at age 65. And your total tax-free income would be $23,700. If you lived for 20 years, the income differential between the two approaches would total $1,000,000.”
What’s stopping you? When will you start? Why not today?
Adrian Spitters, FCSI, CFP, FMA, is a Senior Wealth Advisor with Assante Capital Management Ltd. He can be reached at aspitters@assante.com or visit his website at www.adrianspitters.ca
Win Wachsmann
Win Wachsmann has been helping businesses improve their marketing and helping them get ready to sell their business. He doubles as an author, journalist, syndicated columnist, filmmaker and businessman who makes his home in the Fraser Valley of British Columbia. His articles and columns can be found in some of the finest offline and online magazines, journals and media properties.
He can be reached at win@wachsmanncommunications.com.