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Investing your hard-earned dollar can be a hard decision to make. There are so many different ways to earn more with less; some that are even tax-free and some that aren’t. So which way will you go – registered savings plan or unregistered? Here are 5 reasons why a TFSA would be a good option for something registered.
Tax Free Earnings
While a TFSA doesn’t have the tax break that an RRSP has, the interest it earns is tax free. There are few restrictions - the TFSA account holder must be at least 18 and a resident of Canada; you never lose your TFSA contribution room (both withdrawn contributions and income may be redeposited into the TFSA but you must do so after the end of the year in which the withdrawal occurred to avoid penalties).
Age-Ineligible Taxpayers
RRSP’s are only available until the end of the year in which the taxpayer turns 71 at which point they will be automatically turned into a RRIF or annuity. Once it converts to a RRIF, withdrawals are taxable and mandatory. The taxpayer can take these withdrawals and reinvest into a TFSA where there is no age limit allowing the tax-paid funds to grow. Contributions are still limited to the current $6000 limit for 2019 and foreseeable future.
Income Splitting
With recent changes to tax on split income, a TFSA is a great way to still split your income legally. The Attribution Rules do not apply to a TFSA. However, there is a catch… The funds have to come from one person to the other as a form of a gift then invested into a TFSA.
Single Seniors
TFSA’s allow better RRSP melt-down strategy enhancements. When you melt-down an RRSP (withdrawing taxable benefit payments), you should draw down enough to reach the top of the income bracket without going over in order to avoid higher tax rates. By doing this, it allows you to decrease your tax liability that your estate may incur after death. So what should you do with these withdrawals if you don’t need them? Max out your TFSA. By depositing funds into your TFSA, it will continue to build your income on a tax free basis.
Estate Planning
TFSA’s lose their tax-exempt status after the death of the plan holder. This means that any interest earned becomes taxable. But a TFSA doesn’t necessarily need to stop there. Upon the death of the plan holder, a rollover opportunity becomes a viable option. A rollover is possible only when the spouse of common-law partner becomes the successor account holder. This rollover does not affect the spouse’s contribution room and will not reduce their existing room either. If the taxpayer passes without a spouse, the plan should be transferred to another appropriate savings vehicle.
We can workout a few tax scenarios when it comes to your investments and which will give you the best bang for your dollar. Reach out to us and book an appointment today!
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