In TFSA Part 1, we covered how the cumulative contributions and the power of compounding makes this account extremely attractive. The good news continues…read on.
In Part 2, I am going to touch on several important points that everyone should be aware of.
Tax Free Income. To many this is not new, the income from a TFSA is not taxed. However, this wasn’t of interest or concern when the first allowable contribution was only $5,000 in 2009. With the cumulative contribution amount now $63,500 since 2009 and with the power of compounding, your TFSA as mentioned can turn into a very large account.
The key point I want to stress is you now have a wonderful account to help you manage your day to day life even better. If you require more income or you are close to having part of your OAS clawed back, you can withdraw funds Tax Free from your TFSA without effecting this ceiling. If your taxable income is close to bringing you into the next tax bracket and you want to avoid this but need money for a purchase, you can withdraw the funds from your TFSA completely Tax Free.
With our approach of owning companies that pay and increase their dividends, you can use this cash flow to start and pay yourself a monthly income Tax Free. I think you can see the benefits.
It is very important to remember that the year you withdraw the funds, you have to wait until the following year to return the funds you withdrew. Also, if you contributed $10,000 to your TFSA and it grew to $20,000 from compounding, you can withdraw the full $20,000 and return the $20,000 even though you contributed only $10,000. This is another great feature.
The importance of a successor holder and naming a beneficiary on your TFSA.
Why, you ask? Well, in marriage or a partnership, it is advisable to assign a successor holder. When a spouse or partner passes, their TFSA moves into the surviving spouse or partner’s TFSA tax free without affecting their contribution limit.
The benefit is if the surviving spouse lives another 20 or 30 years, there are technically two TFSA accounts compounding as one.
When the surviving spouse passes and whoever the named beneficiary is, the funds go to them 100% TAX FREE IMMEDIATELY.
In summary, you want your TFSA account to grow as large as it can while you are alive so you can use the tax free withdrawal when needed and then have those funds go tax free to the people you care about.
If you would like to discuss TFSAs in more detail, please give us a call.
“How will you replace your current income in retirement?" - Jim Seyers