Changes To The TFSA

With another tax season in the rear-view mirror, our attention turns to a much more important topic—what to do with the refund cheque. There are so many options—from booking a well-earned vacation down south to paying off credit card debt (likely accrued on that vacation down south), to buying a new TV (on which you can watch Destination Discovery to learn more about your potential vacation down south), or maybe just putting money aside for a rainy day (which would be great to escape by heading down south).

Author’s note: Can you tell where my headspace is?

And as if those were not enough options, the Minister of Finance has given Canadians another one to seriously consider by recently deciding to increase the Tax Free Savings Account (TFSA) limit from the current $5,500 annually to $10,000, effective January 1, 2015.

What does this mean? Well, it could add up to big tax savings for Canadians who take full advantage of the TFSA because every dollar contributed is able to grow, tax-free. Perhaps the increase is just what the TFSA needed to really kick their usage into high gear and gain the traction that was anticipated when they were first introduced in 2009.

What makes the TFSA so attractive is its flexibility. The TFSA is most often compared to a Registered Retirement Savings Plan (RRSP); however, there are numerous differences between the two that go beyond the scope of this article.

Typically an RRSP is used strictly for retirement money (there are exceptions, but those have been covered in another GGFL article) and is not withdrawn until an individual is no longer in the workforce and then requires these funds to maintain their standard of living. Once an individual reaches a certain age, there are limits and restrictions on how much can be taken out, and when.

On the other hand, TFSA contributions can be used for any purpose, short- or long-term, and can remain in the account for as long as you wish. There are no forced withdrawals. Sounds like a pretty compelling place to put some money, if you ask me.

A common complaint regarding the RRSP has always been the locked-in feature. What if the individual needs that money for an emergency? This is where the TFSA offers a distinct advantage.

A common question young Canadians have is whether they should invest their money in a TFSA or RRSP. The recently announced increase in the TFSA limit only makes the answer much more challenging. The TFSA offers a greater degree of flexibility, something the younger generation seem to greatly value. The funds are available for withdrawal should the individual need to buy a car, or in the unfortunate instance where they lose their job. Money can then be contributed back to the plan at a later date when there are once again excess funds.

However, there is a common misconception that TFSAs are for young people. This just is not true. There are benefits to the older generation, to those already drawing on their pension plans and RRSPs. In cases where a retiree does not need all the money they are forced to withdraw from their RRSP, a TFSA offers a great place to park the excess funds without attracting any further tax in the future.

It is important to note in this context that withdrawals from the TFSA are not treated as income, and therefore, would not affect entitlement to Old Age Security. This represents another major benefit for seniors.

When the TFSA was first introduced, one of the criticisms was the $5,500 annual cap on contribution room. Would it really be possible to defer enough tax while contributing $5,500 per year? The increase is welcomed by people of all ages given the ability to shelter income, which is why I fully expect the use of the TFSA to increase.

Whatever path you decide to take, it is now more important than ever for young Canadians to save for the future given the lack of company pension plans that will be available to help fund retirement.

For more information on this and any other accounting needs, contact Kody Wilson at 613-728-5831 or visit us on the Web at www.ggfl.ca. You can also follow us on Twitter @GGFLCA.