The TFSA was introduced more than six years ago but there are a few things you may not know or understand. Here are some handy tips to let you take advantage of this new(ish) tax shelter.
1. You can only contribute when you reach the age of majority
You can’t open up a TFSA until you reach the age of majority. It’s 18 in Alberta, Manitoba, Ontario, PEI, Quebec, and Saskatchewan, and 19 in BC, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, and Yukon.
So, if you were born in 1992 or later, your TFSA contribution room starts to accumulate in the year you turn 18 or 19 and have a social insurance number.
2. Contribution room keeps growing
Like an RRSP, your contribution room accumulates and doesn’t disappear if you don’t max out your TFSA every year. The amount you withdraw can also be put back in future years without reducing your available contribution room.
If you manage to grow your TFSA to $60,000 and withdraw the full amount, you’ll be able to contribute $60,000 back to your TFSA plus any unused contribution room in subsequent years.
Unlike an RRSP, your contribution limit isn’t based on 18% of your earned income from the previous year. Everyone has the same amount of room—currently $10,000 annually. If you were out of work for a period of time, your contribution room will still grow.
And you don’t have to stop saving in a TFSA once you reach a specific age. You have to stop making RRSP contributions in the year you turn 71.
3. Enjoy great tax savings
Investing in a TFSA instead of a non-registered account will help you pay a lot less tax. If you save $200 a month in a TFSA for 20 years, you’ll have more than $11,045 in tax savings versus putting away the same amount in an unregistered account. (We assumed you paid a tax rate of 21% on investment income based on 40% interest, 30% dividends, and 30% capital gains.)
4. Government retirement benefits unaffected
If your income is low enough and you receive Old Age Security (OAS), you may be eligible to receive the Guaranteed Income Supplement (GIS). But when you have income from a non-registered account or a Registered Retirement Income Fund (RRIF), it could lead to a reduction in government benefits. (You’ll need to convert your RRSP to a RRIF in the year you turn 71 and start paying tax when you make withdrawals.)
If you’re single and your income in retirement is currently below $17,088, you’ll qualify for GIS. But if your income is above that, your benefits are reduced. Imagine you have additional income of $3,000 a year from your non-registered account; it will reduce your GIS benefits by 50%. However, if that $3,000 income is from a TFSA, your GIS benefits are unaffected.
And if you receive OAS, your benefits are clawed back once your retirement income exceeds $72,809 at a rate of 15%. If you make $3,000 more that amount from a non-registered account, your OAS will be reduced by $450. But if the $3,000 in income is from a TFSA, your OAS benefits won’t be reduced.
Flickr: Bertram Nudelbach