Navigating the TFSA Landscape

Author: Krista Kardash, CFP

 

One of the most common areas of confusion for Canadians is the Tax Free Savings Account (TFSA).  Though launched in 2009, many people are still unclear as to both its rules and how it fits into their overall financial plan.  To add to the confusion, the rules have changed twice over the past year.  Here are the answers to some of the most common questions about TFSAs I get asked as a financial planner.

 

How much contribution room do I have?

The maximum contribution limit as of January 1^st, 2016 is $46500.  If you turned 18 after 2009, be careful, as your contribution room will be lower since you do not start accruing room until your 18^th birthday.  If you withdrew from you TFSA in previous years, that room is recaptured each January 1^st.  If you are unsure of your contribution limit due to previous contributions and withdrawals you can find out your limit by calling the Tax Information Phone Service at 1-800-267-6999 or by going to www.cra-arc.gc.ca and signing up for CRA login services.

 

How will the changes over the past year affect me?

In April 2015, the former Conservative government increased the annual contribution limit from $5500 to $10000 and made the change retroactive to January 1^st, 2015.  This means that if you contributed only $5500 in 2015, you have another $4500 of unused contribution room.  Then, this fall, following their election win, the new Liberal government repealed this change and lowered the annual limit back to $5500.  They did not make any changes to the 2015 limit; the change is effective for 2016 and future years.

 

What is the main benefit of the TFSA?

The main benefit of the TFSA is that income earned within the plan is never subject to income tax.  This is in contrast to both non-registered investment accounts, in which income is taxable in the year in which it is earned, and RRSPs in which income is taxable in the year it is withdrawn.  This means that more of your investment earnings stay in your pocket when you invest within a TFSA.

 

Should I contribute to a TFSA or RRSP?

While this depends on your personal situation, consider these two factors: the intended use for the money and your tax rate.  TFSAs may be a more flexible investment plan for many savers because you will not have tax implications when you withdraw from the plan.  This is in contrast to the RRSP in which a tax deferral is created when you contribute (often generating a tax refund) because the plan is specifically intended for retirement savings.  When you withdraw from an RRSP, the amount withdrawn is included in your taxable income and subject to income tax.  So, if you are saving for a goal other than retirement, a TFSA could be more suitable.  Additionally, if you think that your tax rate is lower than what you predict it will be in retirement (especially if your income is within the first tax bracket limit of $45282) a TFSA could be more suitable.  This may be the case if you are young, semi-retired or retired, starting a new career, expect your income to rise in the future or are currently experiencing a reduced income for any reason (such as taking parental leave, a sabbatical or working reduced hours).  Often, a combination of a TFSA and RRSP will be suitable.

 

Can I deduct my TFSA contribution from my income and receive a tax refund?

No.  While RRSP contributions constitute a tax deferral, TFSA contributions do not.  However, income earned within a TFSA is never subject to income tax while income earned within an RRSP, although immediately deferred, is ultimately subject to income tax when it is withdrawn.

 

What types of investments can I purchase within a TFSA?

Generally, the types of investments permitted within a TFSA are the same as those permitted within an RRSP.  These include investment vehicles such as cash, term deposits, mutual funds, securities and bonds.

 

I’m not a Canadian citizen.  Can and should I contribute to a TFSA?

While any individual who has attained 18 years of age and has a valid Social Insurance Number is eligible to open a TFSA, whether you should depends on many factors.  Please contact a qualified financial planner to discuss your specific situation.

Every person’s situation is unique and varied and the investment plans that are most suitable for you will depend upon your individual circumstances.  To explore the best fit for you, come have a chat with Lakeland Credit Union’s team of professionals.

*Press Release from the Lakeland Credit Union in Bonnyville & Cold Lake