by Léo Richer | Chair, Pension and Financial Wellness Committee
Curious about the advantages of Tax-Free Savings Accounts (TFSAs)? Melissa Arenas, Senior Financial Advisor with Alberta Treasury Branches, gave an excellent presentation to the Pension and Financial Wellness Committee on this topic last fall. Here’s what we learned.
A TFSA is a vehicle that allows you to set money aside in eligible investments and watch those savings grow tax-free throughout your lifetime. It is much more than a savings account! Every year since 2009, the Canadian government has set out a maximum contribution amount. Currently, it is $6,000 for 2022, and the total amount since 2009 has grown to $81,500. If one has not contributed in the past, one can invest up to the full $81,500 limit at any time.
Flexibility is one of the main advantages of a TFSA portfolio. TFSAs can hold various investment products, such as stocks, bonds, exchange traded funds (ETFs), mutual funds, and guaranteed investment certificates (GICs). This is what makes them ideal for building an investment portfolio customized to your return and risk profile. Would this be available and beneficial for retired Canadians? Absolutely.
Your TFSA grows tax-free, and you can make withdrawals freely. Withdrawals do not affect government benefits such as Old Age Security, Guaranteed Income Supplements, or Employment Insurance. It is an efficient tax-planning tool, as you don’t pay taxes on the money earned within your portfolio. For example, if you have interest earnings of $500 in your TFSA, you do not ever pay tax on that $500.
A TFSA can be used as supplemental tax-free income and there is no mandatory withdrawal age. Unlike RRSPs, TFSAs are not based on earned income. TFSA contributions are made with after-tax dollars and the CRA allows contributions to a spouse or common-law partner’s TFSA to maximize your contributions.
One further benefit is that withdrawn funds can be reinvested in your TFSA in future calendar years. If you withdrew $10,000 in 2020 you would have been able to invest $16,000 in 2021 (the $6,000 yearly allotment plus the $10,000 withdrawn in the previous year).
Finally, it is a great estate planning tool. If your spouse is the successor holder of your TFSA, they can receive the value of the account as of the date of death paid to them or to their TFSA tax-free. As well, your beneficiaries, other than your spouse, can receive the value of the TFSA account as of the date of death paid to them tax-free.
Of course, there are rules to follow when working with a TFSA, but the rules are simple and not cumbersome. Please see the presentation by Melissa Arenas for more information, and also consult and follow the Canadian government TFSA guidelines.