You probably already use RRSPs as a way to save for the
future. But ever since the federal government introduced Tax Free Savings
Accounts (TFSA) in 2009, you have another option. This type of investment
account can serve as a supplement to your RRSP, but how do you decide which
plan is best for you?
First the great news: Your lifetime contribution limit to a
TFSA rose to $46,500 for 2016! What follows in this article is a list of
information that might help you decide which is best for you, RRSP, TFSA (or
maybe a mix of both).
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Roman Mlynko, CIM, CFP
Wealth Strategies Consultant
Ukrainian Credit Union Limited
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If your annual income is low, then the TFSA can be a better
alternative because the tax-free withdrawal feature and flexibility with which
you can sue the TFSA can outweigh the benefits of the small tax deduction you
get for making an RRSP contribution.
If you are just entering the work force then you should
probably start by investing in a TFSA account.
After a while, when your income
is higher and you’ve had a chance to accumulate enough contribution room to
really take advantage of the tax deductions RRSPs provide, then you might want
to consider starting up an RRSP account.
If you need a loan, you can use the TFSA as collateral
(unlike an RRSP). However, interest paid on a TFSA or RRSP loan is not
tax-deductible.
A TFSA may also be better than the RRSP Home Buyers Plan or
Life Long Learning Plan savings for housing or education. That is because any
money withdrawn from a TFSA does not need to be returned, or if you decide to
use the money for other purposes, you do not have to pay taxes.
If you already have investments sitting in GICs, money
market mutual funds, term deposits or bonds, which pay interest that is taxable
in full, why not place those investments into a TFSA, where those profits will
be protected from tax. If you have a high-risk / high-yield investments, a TFSA
may also be better than an RRSP account. For example, if your initial $10,000 investment
in a TFSA increases to $100,000, the entire amount can be withdrawn tax-free! The
downside is that you cannot use the so-called "capital loss" tax deduction if any of your
investments within a TFSA lose their value.
Investments in a regular account can be transferred to a
TFSA, but you should first consult with an expert on the possible tax implications.
If your pension fund limits your contributions to an RRSP, use
a TFSA to supplement your retirement savings.
If you are going to retire in 10-20 years, use your TFSA to
accumulate retirement savings more aggressively than is typically possible with
other tax-sheltered investment vehicles.
If you have maxed out your RRSP contribution room, use a
TFSA to shelter additional investments form taxes.
If you want to reduce taxable income in retirement, use a TFSA
in addition to an RRSP account. After you transfer your RRSP into a RRIF (when
you turn 71), money that is withdrawn from the RRIF is taxed according to your
income level. So, if you do not need all of the money that you have withdrawn
from a RRIF/LIF, put the remainder into a TFSA where it can continue earning
interest without you having to pay more tax on the earnings. If you receive Old
Age Security, Canada Child Tax Benefit, Employment Insurance or the Guaranteed
Income Supplement, use a TFSA to avoid potential reductions of these payments
because money taken from a TFSA is not considered income.
These tips are of a general nature. Your situation is unique
and needs to be analysed for your personal requirements .If you have any questions about
TFSA, RRSPs or other investment plans, please contact me or one of our other investment
advisors for professional advice.
May you be successful in your investing
Roman Mlynko, CIM, CFP
Wealth Strategies Consultant
Ukrainian Credit Union Limited
416-763-5575 x201
ukrainiancu.com
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