Key Benefits of the Tax-Free Savings Account (TFSA)

03 November 2018 by National Bank
TFSA Investments Explained: Key Benefits by Life Cycle

Throughout your adult life, you live in a continuous process of growth and change where your needs and income change. The TFSA is a more flexible investment vehicle than an RRSP so it can adapt to your evolving needs, allowing you to maximize the profit you earn from your investments.

From 18 to 34 years old: the younger you are, the more flexibility you need

As you enter adulthood, it’s crucial that you build an investment portfolio. You will be better prepared for significant expenses that you are likely to incur over the course of your life; buying a home or cottage, doing expensive renovations or starting a business.

When you put your money in a TFSA, flexibility is the major advantage. You can access your savings without a lot of complication because withdrawals are not taxed – a kind of flexibility that the RRSP does not have. The TFSA also gives you the ability to withdraw money to reinvest it later, without losing contribution room. However, if you do choose to reinvest in the same year that you made a withdrawal and you exceed the annual limit, you may be subject to a monthly interest of 1%.

This is a time of your life when your income is likely to be at its lowest, as our salaries tend to increase as we age. The TFSA is especially convenient for those with low or modest incomes because you can withdraw everything you’ve invested once you retire. In fact, the majority of people who have a TFSA make an average of less than $30,000 per year.

From 35 to 49 years old: accessing your assets without worry

During this period of your life, unexpected events can have a big impact on your income and lifestyle. The TFSA gives individuals who have unexpected financial obligations the ability to access their assets without any penalty.

For example, let’s take Simon and Mary who have lived together for three years. They’re both 38 years old and they decide to buy a house. Since Mary already owned a condo with her former spouse (from whom she has been separated for fewer than five years), neither she nor Simon can benefit from the Home Buyers' Plan (HBP) that’s linked with the RRSP. But both have had a TFSA for several years. They can use the savings from their TFSAs to cover the costs of moving or to make new purchases and they don’t have to worry about paying tax upon making a withdrawal, something that isn’t true with the RRSP.

From 50 to 64 years old: achieving tax efficiency

At this age, you have reached a period of your life that is crucial for determining the make-up of your portfolio. Now is the time to consider many factors to ensure that your assets grow as much as possible while you’re active in the workforce.

You must determine when your tax rate will be at its lowest so you can choose the investment vehicle best suited to your needs.

For example, if you know that your tax rate will be lower when you retire than right now, it’s better to invest in an RRSP.

When the time comes to withdraw money, you’ll pay less tax. On the other hand, the TFSA is a better option if you anticipate a higher rate upon retiring.

Age 65 and up: improving your financial situation

The TFSA is the golden ticket for retirees. Not only are withdrawals not taxed, they have no impact on the benefit amounts you receive from the government. This is not the case for the RRSP, where withdrawals are calculated as a part of the total amount of income.

The TFSA also gives retirees greater control over their finances beyond the age of 71. Unlike RRSPs, there is no need to convert the TFSA to retirement income. In addition, the TFSA does not require any minimum annual withdrawals.

A TFSA should not be used in place of an RRSP

As with any healthy financial portfolio, diversification is the key to investment success. If your RRSP is used exclusively to fund your retirement, you can use your TFSA for other things. Striking a balance according to your financial situation will guarantee stability.

The RRSP at a glance

RRSP contributions can be used for tax deductions, but withdrawals are counted as income and taxed at the present rate.

About the TFSA

The TFSA can’t be used for tax deductions. However, contributions you make to your TFSA are not taxed upon making a withdrawal.

The TFSA at a glance

  • The TFSA is not a product. It is an investment vehicle.
  • Like your RRSP, it is essential that the return on the investments held in your TFSA offsets the loss of your purchasing power because of inflation.
  • It’s always more profitable to invest your savings in a TFSA than in a chequing account.
  • From 2009 to 2012, the annual TFSA contribution limit was $5,000. It was raised to $5,500 in 2013 and 2014, before rising to $10,000 in 2015, and reduced to $5,500 between 2016 and 2018 and will increase to $6,000 in 2019, 2020 and 2021.
  • You must be 18 or older to contribute to a TFSA.

The TFSA is an investment vehicle that offers significant benefits at all stages of your financial life. You can take full advantage of this investment vehicle!

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