The recent federal budget proposes a little acclaimed gift to all of us in the form of doubling the amount one can contribute to tax free saving accounts or TFSAs. Critics have denounced TFSAs as a gift only for the wealthy but that is clearly not the case. Even prior to the budget announcement, there were nearly 11 million Canadians who had TFSAs with total assets of $120 billion dollars socked away in these tax shelters. Hopefully with the new limits even more people will recognize the benefits and take advantage of these savings vehicles.
As David Chilton in his popular book The Wealthy Barber has acclaimed, the first rule of financial management is ‘pay yourself first.’ Paying yourself first and putting your savings in a TFSA is a great financial tool for everyone over the age of 18.
Firstly, money put away in a TFSA is set aside from normal savings and can be a great way to establish either an emergency fund or a targeted savings plan for a major purchase such as the down payment on a house, a vehicle or a holiday. The rules are reasonably flexible for withdrawals, however, there are restrictions for replacing the withdrawals within the same calendar year. Secondly they are a great partner in any retirement savings plan allowing your investments to grow free of the tax man’s greedy hands..
The true beauty of the TFSA is that everyone over 18 years of age has an annual contribution limit that is now $10,000 (once the budget is passed) and that annual limit can be carried forward from year to year. If one doesn’t contribute in one year they can defer it to the next. To date the total contribution from the year 2009 until 2014 is a total of $31,000.
With a TFSA your contribution is made from after tax dollars so there is no tax upon withdrawal. This is the opposite to the situation with registered retirement savings plans (RRSPs) where a tax rebate is given for any contributions made within the legislated limits. The only problem with RRSPs is that for the younger investor, their taxable income may be low but the tax refund looks tempting. When they come to retire or otherwise withdraw their savings, the withdrawals are taxable and if their taxable income has increased, which it presumably will, the tax due will more than offset the previous tax refund.
Both registered retirement plans and TFSAs allow your investments to grow tax free. Investments can also be made in a variety of investment vehicles including GICs, equities, bonds etc. and can be held in self-directed accounts.
There is, however, no magic formula for which type of retirement plan is best, so everyone should decide for themselves or seek professional advice to see which plan or combination of plans is most suitable to their own financial situation.
The bottom line regardless of which plan you chose is however, ‘pay yourself first,’ and ensure a secure retirement.
Just a word of disclosure – I am not a financial planner and have no qualifications in that field, I only speak as a lay saver/investor/retiree.
Ken Allred is a former St. Albert alderman and MLA
