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TFSAs – Coming of Age in 2015


TFSAs have become a much more valuable investment option today as a result of the last budget update, which now allows Canadians to contribute up to an annual maximum of $10,000 going forward. This new annual limit will no longer be adjusted up for inflation, so future increases will need to be legislated.

Now more than ever, TFSAs are more than a simple savings account. In addition to cash or GICs, they can hold stocks, bonds, mutual funds, EFTs and many other investment options.

Anyone who has not started one yet and over 24 years old could now invest $41,000 to catch all of their allowable contribution room, which for a couple is $82,000. There are rules which require tracking one’s annual contributions and withdrawals, so as not to over-contribute, as there’s a 1% per month penalty on the over-contributed amount. It’s also important to keep in mind that money withdrawn from your TFSA this year can’t be re-contributed until January 1st next year.

Unused contribution room carries forward and can be caught up at any time, plus if you made a full withdrawal in any year, you could reinvest it all back in the following year if you had the available cash, along with that year’s allowable contribution room.

Going forward, individuals should calculate which investment option, RRSPs or TFSAs makes the most sense for them. As food for thought here; generally, for individuals earning up to $50,000 a year, TFSAs might make more sense, as RRSPs don’t give you much of a tax deferral savings opportunity. This especially so if you end up in a higher tax bracket when you start to taking RRIF income.

Conversely, there may be some benefit for Canadians nearing retirement to withdraw funds early from their RRSPs and deposit them into a TFSA. Wealthier clients who have maxed out their TFSA contribution room under the old limit, could benefit by moving the extra $4,500 now allowed from any non-registered accounts. Ideally, funds should be moved from investments held in fully taxable interest bearing accounts or from those where there is minimal imbedded capital gains.

For those still working and earning income beyond age 71 and having to take RRIF income they don’t need, adding to their TFSAs might be a viable option. The advantage is that future withdrawals from their TFSA won’t have any impact on any income tested benefits such as OAS payments.

So as mentioned above, don’t be misled by the TFSA ‘savings account’ name into thinking these accounts can only be set up into daily interest or GIC options with today’s low rates.

Take the time for a review with a trusted financial professional to help you decide which investment option might be the best for you individual needs. Each person’s individual reason for investing needs to be taken into consideration, as well as your investment time line and risk tolerance.
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