Tips on Building Tax-Efficient Wealth: 5 Reasons to Use the TFSAPosted: February 19, 2019 By: Evelyn Jacks
Posted in: Strategic Thinking, Retirement, Wealth planning, TFSA, rrsp, retirement income, maximum contributions
When generating tax-efficient wealth is your goal, consider investing in your TFSA. Despite enduring some political controversy over the years*, the TFSA has gained a broad-based acceptance by over 13 million Canadians. This is especially true for two demographics - the Boomers and the millennials as reported by Statistics Canada**. Read on for five compelling reasons.
- The income accrues and is withdrawn on a tax free basis. There is no deduction for the contribution to the TFSA (it’s made with tax-paid funds), but income growth is never taxed. The big criteria to consider in making contributions: the TFSA account holder must be at least 18 years of age and resident of Canada. Another important tax fact is that you never lose your TFSA contribution room. That is, both withdrawn contributions and income may be redeposited into the TFSA, but you must observe recontribution restrictions: do so after the end of the year in which the withdrawal occurred to avoid penalties.
- TFSAs are great for family income splitting: The Attribution Rules do not apply to the TFSA as resulting income is tax exempt. However, it’s important that the TFSA holder contribute the funds. So it makes sense for one spouse to make a gift to the other; subsequent investmentof the gift by spouse to a TFSA is allowed. Parent or grandparents may also wish to gift money to their 18 year old, resident children or grandchildren in a similar fashion.
- New opportunities for RRSP age-ineligible taxpayers: The RRSP tax shelter is only available until the end of the year in which the contributor turned age 71, at which time the plan must be converted to a RRIF or annuity. Even if the RRIF/annuity holder doesn’t need the money, taxable withdrawals must begin. However, anyamounts not needed for living expenses can be reinvested into a TFSA, where there is no age limitation, allowing those tax-paid funds to grow again—and faster—in a tax-sheltered account, as opposed to a non-registered account. However, annual TFSA contributions are limited to $6000 in 2019 and the foreseeable future, until indexing levels are met again. Contribution room available to those adults who have never made TFSA contributions is currently $63,500.
- Benefits for single seniors: RRSP melt-down strategy enhancements. In melting down RRSPs, that is, withdrawing taxable benefit payments, it’s important to draw enough to reach the top of an income bracket; above this, higher marginal tax rates are applied. This is an important strategy particularly if taxes will be higher at death than during life. What to do with the money after-tax? Deposits into a TFSA will continue to build income for retirees on a a tax-free basis to keep financial growing, but this time, tax free.
- Estate planning considerations. The TFSA loses its tax-exempt status after the death of the plan holder, meaning the investment income earned after death will become taxable. However, a rollover opportunity is possible when the spouse or common-law partner becomes the successor account holder. This rollover will not be affected by the spouse’s contribution room, and will not, reduce their existing room either. In the case of a taxpayer dying without a spouse, the plan assets should be transferred to another appropriate savings vehicle.
Additional educational resources: Help clients take advantage of the TFSA for maximum tax-efficiency potential. Enhance your knowledge by taking the MFA™- Retirement and Succession Services Specialist designation program. The Spring CE Summits taking place this May and June will also add value by providing an update on post budget action strategies.
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