10 Ways to Benefit From Contributing to a TFSA
With the launch of the new TFSA accounts this year, many are wondering if they should contribute to one and what the benefits are. Let’s explore 10 reasons why contributing up to $5,000 per year to this savings account is the best plan for your short and long term savings goals.
1. Emergency Funds
Emergency funds or rainy day funds, parked in a high interest savings account, guaranteed investment certificate (GIC) or money market fund, if they are non-registered savings will generate taxable income each year. Save yourself some taxes and keep your savings in the same type of account, but switch it into a TFSA to save you tax money.
2. High Risk Investment Speculation
TFSAs can be a great place to invest in equities and other high risk assets such as speculative stocks or penny stocks. The entire amount of interest you would gain from these investments would be tax free. What if you lose your investment? Beside the value of your investment, you would lose the ability to claim a $5,000 capital loss.
3. Collateralized Lending
Unlike RRSPs and RRIFs, you can pledge your TFSA assets as collateral for a loan or secured line of credit, which may lead to a lower interest rate than an unsecured line. This is a great advantage especially if your TFSA builds up value over future years.
4. Protecting Government Benefits
For Canadians with low and modest incomes, the TFSA can help preserve income-tested government benefits since TFSA withdrawls are not considered to be income. For young people who are receiveing GST credit or the Child Tax Benefit, they can protect these funds by investing in a TFSA and having withdrawls anytime. For seniors receiving Guaranteed Income Supplement or Old Age Security, again the funds can be protected in a TFSA. Neither TFSA contributions nor its earnings affect eligibility for the Guaranteed Income Supplement, Old Age Security, the Canada Child Tax Benefit or other government benefits based on income.
5. Tax Rate Planning
For Canadians with limited funds who are in a lower tax bracket but who expect to be in a higher tax bracket upon retirement (i.e. farmers, selling a business, etc) contributing to a TFSA may be more beneficial. Ultimately as you get into a higher tax bracket before retirement, TFSA money can be moved into an RRSP, tax-free, moving the individual into a lower tax bracket and restoring TFSA contribution room.
6. Retirement Planning
Taxpayers who cannot contribute to RRSPs — i.e. someone over the age of 71 or with no earned income or with a large pension adjustment — can use a TFSA to invest for retirement on a tax-free basis with no forced minimum withdrawl.
7. Education Planning
While RESPs are the vehicle of choice of saving for education because of the federal and provincial grants, TFSAs can be another vehicle to save for education.
8. Income Splitting with Spouse and Kids Over 18
You are permitted to give your spouse or partner funds to open up their own TFSA without having normal attribution rules for income and capital gains apply. You may also give each child over age 18 money to open up a TFSA. NOTE: You cannot open up an “in-trust for” TFSA.
9. Estate Planning
The entire TFSA will be tax free upon death if you have named a beneficiary, bypassing estate and savings probate fees.
10. Emigration Planning
Clients wishing to emmigrate from Canada can still hold a TFSA. No future contributions can be made without paying a penalty.
