3 life stages and your TFSA

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The TFSA is quickly becoming one of the most effective savings plans available to Canadians. When it was introduced 7 years ago...Yes, 7 years... the contribution limit was only $5000, and many thought it was too small to have a meaningful impact on their portfolio. Because the contribution room increases each year, on January 1, 2015 we were able to enjoy another $5,500.00 of new contribution. This also means that for those who have never contributed, the lifetime allowable contribution limit has quietly gotten large and has risen to $36,500 per person (or $73,000 when we plan for a couple).

I believe the TFSA is starting to realize the major potential that it has to offer and I wanted to share 3 key strategies I have been discussing with clients for how a TFSA can impact their financial plan. 1. Saving for retirement. Last year I wrote a Martens Report titled 'A thought on your TFSA and your retirement plan' about taking a long term investment approach within your TFSA. I have long been advocating that the TFSA should be considered as a part of your retirement savings plan, either on its own or in combination with your RRSP. Even though you do not enjoy an income tax deduction when you contribute (like you get with the RRSP) having a tax free source of income will be a huge benefit in the future, and over time the savings can really add up. If you planned to add the current annual contribution amount of $5,500 each year from age 30 - 65, and earned 7% annual rate of return, you would amass a TFSA account valued at $813,524.00 (after $192,500 of total deposits), all of which would be accessible with no income taxes whatsoever. If $5,500/year is a bit too steep for your budget, plug in your own figures into the Fidelity Growth Calculator and see where you might end up. No matter what you can manage to save, I am sure you will agree that over time it can add up, and you'll enjoy never paying any tax on it. 2. Income during retirement. Retirement is when the "tax free" part of the program can really start to benefit you. First, here are some notable income levels to consider.

  • Ontario Income Tax BracketsInformation as of July 1, 2014

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  • Old Age Security (OAS)OAS begins to be clawed back if your income goes above $71,592 and is fully clawed back if your income is $116,103 or higher.

Let's assume that you have successfully built up your TFSA and are about to retire and begin using this money. Since the funds in your TFSA come out tax free, you can take advantage of this in a couple ways. If you are planning a large expense in your retirement years, you can get a little extra money without increasing your income. Whether you're planning to take the whole family on that Hawaiian vacation, buy a new vehicle or do a home renovation, you can access this money without incurring an increase to your income or income taxes. Another option is your TFSA could be used if you need a little extra money each month. You can set up a plan to automatically withdraw funds from your TFSA (monthly/quarterly/annually... However best suits your needs). This could be very important if you are close to an income level that would either bump you up to a higher income tax bracket, or put you high enough to have your OAS clawed back.

Take a minute to think about the sources of income you are planning, or receiving, for your retirement years. Does it include CPP? OAS? your RRSP? A company pension plan? Rental income or perhaps a part time job? The one common theme with all of these income sources is that they add to your taxable income and thus are fully taxed. What the TFSA brings is access to money that will not impact your income taxes.

3. Minimizing estate taxes.

Typically the highest income tax bill you will ever pay is the one on your final income tax return. Upon death all your assets are sold and paid out to your beneficiaries, and thus, any income taxes payable are due. There are some programs for spouses that allow for a transfer from spouse to spouse, that will defer the income tax payable (i.e. RRSP's, RRIF's, Joint accounts with rights of survivorship) but eventually the funds will flow to the next generation and in some cases a heavy tax burden could be applied. What's interesting to remember about the TFSA is that there is no tax on the account, so it is one portion of your estate that you will not have to pay any tax on. We have been doing some interesting work with clients where we analyze their assets and plan a strategy to gradually sell off their taxable investments (RRSP's, RRIF's, capital gains positions, etc.) and build up the TFSA to minimize your income taxes on your final income tax return, and ultimately over your entire lifetime.

There is no end to the flexibility a TFSA can bring to your financial plan. The 3 strategies above are some of the common conversations I have been having, but If you would like to discuss your personal financial situation, and see how a TFSA might fit in, please let us know, and we would happy to help.

#tfsa #financialplanning #retirementplanning #investing #estateplanning

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