Why a Tax Free Savings Account

Why have a Tax Free Savings Account

I've been thinking a lot about my future retirement lately and thought I would write down some of my thoughts and ideas, while they are top of mind.

Yes, I'm only 35, but personally I want to start on my plan now, so I have 20-30+ years to works towards my goals. I want to be able to enjoy my time in retirement and hopefully retire early. I don't think my future Canadian Pension will be enough, so that is why I want to start early. I do have some planning in place already, but need more.

I'm lucky to currently not be working and enjoying some free time in Japan, while my husband works here. So my hope is to build a solid plan/focus now, and work on it when I return to Canada.

Today I want to talk about the Tax Free Savings account, which I will refer to as a TFSA.

When I worked in the banking industry, I had many clients mention that they hate Registered Retirement Savings Plans  (RRSP's). I feel that many people think RRSP's are the option for retirement savings, however that is not true. There are so many different sources of retirement savings, and RRSP's are just one of them. The main reason I hear people complaining about RRSP's is that their taxable! When you put the money in, you get a tax return, but when you take it out, you need to claim the money you take as income and pay tax on it.

I strongly feel there is a time and place for RRSP's in most people financial plans, but they are not right for everyone and they are not the only solution.

When I/you retire you need to claim any Government Pension in your taxes, you also need to claim your Company Pension and you need to claim your RRSP income. These are only a few things that are TAXABLE in retirement.

That is why I want to use the TFSA to supplement my retirement income. No, you don't get a tax deduction when you put money in a TFSA, however when you take the money out in retirement the withdraws are not taxable. There are some other rules you need to watch out for with a TFSA to make sure your not penalized, however this tax free benefit is huge for me! If all your money/income is taxable in retirement, you may end up paying a huge amount of tax, so why not have some sources taxable and some not?? Makes sense to me.

My plan and recommendation to myself and others is to have a TFSA set up and set up an automatic contribution to it. Choose an amount that is right for you, that fits into your current budget and is enough to help you achieve your future goals. You can stop this automatic contribution anytime you want. You can also increase or decrease it anytime you want.

There are many other things a TFSA can be used for, and retirement is just one of them. I.E. saving up for a down payment on a home, saving for a vacation, saving up for future education etc etc etc... The plan is yours, so you choose what your goal is!


Educate yourself and your children about TFSA's!!

Some facts about Tax Free Savings Accounts

- There are limits on how much you can put into it, so double check this with your banker
- As of January 1, 2013, Canadian residents, age 18 and older, can contribute up to $5,500 annually to a TFSA. This is an increase from the annual contribution limit of $5,000 for 2009 through 2012 and reflects indexation to inflation.
- Investment income earned is tax free
- Withdraws are tax free
- If you haven't used your previous contribution limits, they can be carried forward i.e. someone that was 18 in 2009, and hasn't put any money into a TFSA should have a contribution limit of around $36,500
- Depending on what your investing in you should be able to take the money out anytime, so if something comes up, you can still access your money in case of an emergency or to use for another need. If you invest in a locked in GIC, you may have to wait until the end of the term.
- If you withdraw from a TFSA, the amount you withdraw will be added back to your contribution limit, the FOLLOWING YEAR. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
- Within the TFSA you can invest in cash, Guaranteed Investment Certificates, bonds, stocks, mutual funds and more
- Contributions are NOT tax-deductible, if your in need of something tax-deductible, you will need to look to an RRSP.
- TFSA assets can generally be transferred to a spouse or common-law partner upon death.


There you go. So again the main reason I want to look at building my TFSA, is so that not ALL my income in retirement is taxable, plus is a disciplined way to invest, if you stick to it.

If you have any comments or questions, please let me know