Peter Boys, Boys Financial Services

Update on the TFSA verses RRSP debate


Now that the annual TFSA contribution limit has been increased to $10,000, Canadians who had maxed out their contributions can now invest another $4,500 for 2015. This increase to $41,000 means TFSAs have become a significate part of many people’s saving and retirement plans, especially for couples. There will be no further annual increases to this new limit, but all Canadians over age 18 can now contribute up to $10,000 annually regardless of income.

Unfortunately however, there still seems to be some confusion about TFSA rules. Like RRSPs, unused contribution room can be used in the future if funds become available. Unlike RRSPs, there is no tax saving or credit from investing in TFSAs. So there’s no pressure to meet an investment deadline, and contributions can be done at any time throughout the year.

Consider someone who has maxed out their contributions every year, and with investment growth it’s now worth $50,000. They can withdraw it all, then redeposit the whole amount including the growth back into their plan the following year. This is in addition to the new $10,000 contribution room for the year.

Many people have their TFSAs held in savings accounts or GICs earning little interest, when ideally they should consider investments with more growth potential because the growth is tax-free. One benefit of TFSAs is the ability to build extra retirement income that isn’t taxable, so it has no impact on any income tested benefits such as the senior’s benefit, OAS, etc.

TFSAs can be deposited into a wide range of investment options, depending on their investment time line, risk tolerance and age. Many people have more than one TFSA account, often one in an interest savings plan for liquidity, and another into an equity type plan for more growth potential. There is no limit to the number of TFSA accounts you can have as long as you don’t over-contribute in any given calendar year. It’s up to you to track your deposits and withdrawals, as CRA penalizes over-contributions at 1% per month until withdrawn.

My feeling is if you have a savings account designed to grow over the long haul, either for a lump sum purchase such as a lake cabin, RV, etc. then a TFSA account makes perfect sense. The reality today is that many Canadians don’t have any savings. Some have RRSPs at work but with no rainy day funds they are forced to cash in their RRSPs for emergencies. This is far from ideal, as they are hit with with-holding taxes, as well as surrender charges and the potential for market loss on top of this.

Everyone’s financial need and situation is different, so there is no simple answer as to whether TFSAs or RRSPs are best for them. Many contract employees in Alberta who are incorporated draw out income primarily as dividends, therefore don’t earn any RRSP contribution room. These people would be much better off maxing out their TFSAs. The same goes for farmers who zero out their tax bill at every year end with next year’s fuel, fertilizer, seed, machinery purchases, etc.

So if you are still not sure, sit down with a trusted financial professional and let them help you determine the best option for you to build a rainy day fund, an educational fund for your grandchildren, additional retirement savings, etc.

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