Retirement Mistake No.39: Not Having Tax-Free Savings Accounts (If You Have Savings)
Posted In: Retirement Planning for Entrepreneurs

What is better than tax-free? RRSPs first started in 1957 to assist self-employed individuals and employees who were not members of a registered pension plan (RPP) save for their own retirement. Quite simply, a RRSP is an investment plan that you register with the Canada Revenue Agency (CRA). Billions have been poured into RRSPs since they were first introduced. Now the next wave is the tax-free savings account(TFSA) or, as I like to call it, tax-free investment account.

Canadian residents 18 years of  age or older can open a TFSA if they have filed a tax return. Simply put, you can contribute a maximum of $5,000 per year, and your earnings will be tax-free. It doesn’t sound like much in the first year, but each year you can add your personal maximum and over 3, 5, or even 10 years, it adds up, tax-free. You will be able to invest in a variety of  options from GICs and savings accounts to mutual funds, and every financial institution in Canada is competing for your TFSA account.

If you take money out of your TFSA, you don’t lose the contribution room–you get it back in the following year, but you will have to wait until the next year before you can put the money back in. As with RRSPs, the contribution room gets carried forward each year, and you can hold more than one TFSA account up to an annual maximum of  $5,000 per person–that’s $10,000 per year for couples.

The big bonuses for retirees are that it will not affect Federal income-tested benefits and credits. Therefore, it will be easier to save, and you can name a beneficary, so it passes tax-free to your estate. Why not earn interest, now that it is tax-free, inside a TFSA account? You are also creating a larger tax-free estate. You can use it to name specific beneficiaries if you wish to give cash right away for immediate needs.

Always remember to get professional legal and financial advice when doing estate planning.

Before you can really start setting financial goals, you need to determine where you stand financially. – David Bach

In God we trust, all others pay cash. – American saying

 

Published with permission from Grant Hicks