New Year's Resolution: Save More (Tax Free)

Jan 09, 2020 | Richard So


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Answering the most commonly-asked questions about the TFSA.

When the Tax-Free Savings Account was first introduced in 2009, some investors considered its benefits to be barely significant. Saving tax on the growth of a $5000 contribution was just not enough to excite people. However, eleven years later, with the benefit of increased contribution levels, growing equity markets, and tax-free compounding, the TFSA has become a sizable component of many investors’ portfolios.  Here are our answers to three common TFSA-related questions.  

How Much Can I Contribute?

Those who have not yet opened a TFSA can now play “catch-up” and contribute up to $69,500. It is important to not over-contribute, which leads to penalties from the CRA of 1% per month. Tracking your historic contributions and withdraws is advisable. See the table below for contribution allowances since 2009.

Year

Contribution Allowance

2009

$5,000

2010

$5,000

2011

$5,000

2012

$5,000

2013

$5,500

2014

$5,500

2015

$10,000

2016

$5,500

2017

$5,500

2018

$5,500

2019

$6,000

2020

$6,000

TOTAL

$69,500

 

How Should I Strategize my TFSA Investments?

Although everyone’s needs are different, we recommend that clients use the TFSA as an investment account, rather than a savings account. Due to the current low interest rate environment, a TFSA that holds deposits and GICs limits the “tax-free” benefit that can be obtained. For that reason, some clients may opt for a more balanced portfolio of stocks and bonds, in order to strive for greater returns, and therefore greater tax savings. If the TFSA account’s holdings comprise a relatively small portion of one’s net worth, then we recommend investing fully in equities and growth assets, to maximize the tax-free compounding of potential returns.

When we perform financial plans that include retirement and estate forecasting, we often see that the TFSA is usually the last account to be drawn on for spending. In fact, for those clients who do not spend all of their liquid assets, the TFSA usually comprises part of their estate, which can be passed on as an inheritance to the next generation. This is because most retirees would naturally first withdraw from their taxable accounts, while trying to retain those assets that are sheltered from tax for as long as possible. As a result, this account has a longer time horizon than most, which allows investors to make longer-term equity investments.  

Should I Invest in a TFSA or an RRSP?

Investors should seek to invest in both an RRSP and a TFSA. We are advocates of maximizing your allowable RRSP contribution every year, in order to receive the immediate tax deduction. Should one have remaining investable capital after the RRSP contribution, then the TFSA would be the next account to invest in.  If one does not have enough funds to invest in both, we advise prioritizing the RRSP contribution. Since the RRSP contribution generates a tax deduction, investors receive a tax refund cheque with their Notice of Assessment. At that time, one can deposit that refund cheque into their TFSA. In this situation, there’s no need to choose. 

We recommend that investors speak to their investment advisors about how to strategically invest in a Tax Free Savings Account, in order to reap the maximum benefit.