Saving for Retirement?

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How a tax free savings account can be a valuable addition to your financial plan

The New Year is a time when many people revisit their personal savings and retirement plans.  Every January 1st, we have an additional 60 days to contribute to our RRSP’s for previous year’s tax return, and another year of TFSA (Tax-Free Savings Account) contribution is available for every Canadian over the age of 18.  Decisions need to be made whether to contribute, how much, and where to invest.

The need for Canadians to independently deal with their financial planning for retirement is on the rise.  Fewer businesses provide traditional pension plans for their employees than years past, which means most people will not have the security of a defined benefit pension plan providing them guaranteed income for the rest of their lives in retirement.

In fact, according to Statistics Canada, only one in four working Canadians has access to a defined benefit pension plan (Statistics Canada, Pension Plans in Canada and Labour Force Survey, April 2009). The tides have turned, and the majority of Canadians need to take a lead role in planning for their own retirement needs.

TFSA’s are still relatively new on the Canadian financial planning scene (introduced in January 2009) so there is still some hesitation and confusion surrounding their rules, how they work, and how they can fit effectively into a financial plan. 

The annual TFSA room available may seem low to some people, but make no mistake, as time goes on, they will play an increasingly prominent role in Canadians financial plans.  When they were introduced in the 2008 Federal Budget, the Government called the TFSA the single most important savings vehicle since the introduction of the RRSP in 1957.  That same year, the CD Howe Institute said “One real advantage of TFSA’s for individuals without an occupational pension is that they will have a mechanism to save effectively.”

As a rare opportunity to generate tax-free income, a TFSA can be an important part of your overall financial plan.  Whether you are saving for the short term (0-5 years) or the longer term (6+ years) a TFSA can be a valuable addition.

  • Contributions can be made anytime for Canadians age 18 and older
  • You can contribute up to $5,000 each year (indexed to inflation to nearest $500)
  • Contributions are made with after-tax income (no tax deduction)
  • You  pay no tax on the investment growth in the account
  • Withdrawals are tax free
  • There is no restriction on how withdrawals may be used
  • You can contribute beyond age 71
  • There is no requirement to withdraw at any age
  • A TFSA may invest in a wide range of qualified investments such as stocks, bonds, GIC’s, mutual and segregated fund contracts.
  • You never lose your contribution room.  Any unused contribution room gets carried over to the next year.  Any amount withdrawn is added back to your contribution room the following year
  • To check your personal contribution room to date check your most recent Notice of Assessment
  • Income growth is not taken into account for eligibility of federal income-tested benefits and credits such as OAS (Old Age Security), GIS (Guaranteed Income Supplement), Child Tax Benefit.
  • Upon death, a TFSA can roll to a spouse’s TFSA if they are the named beneficiary.  The surviving spouse does not need the TFSA contribution room for this rollover.

Your current and future income and levels of taxation are one of the main considerations in how to structure the combination of TFSA’s and RRSP’s in your financial plan.  Your financial advisor can help you determine the right fit for your personal situation.

 

Link to column as it appeared in Elgin This Month February 2012 edition (page 18)

 

Stephanie Farrow, B.A., CFP.,  Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation.  Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010 and hosts our Farrow Financial Blog and Twitter @farrowfinancial.  Stephanie and her husband Ken Farrow own Farrow Financial Services Inc., are busy raising three young children and actively involved in the community. Our Financial Services Team.