The Tax-Free Savings Account (TFSA) is an account that allows your money to grow tax-free. But do you really know all the benefits?
“The TFSA is like a wild card in your deck of cards when it comes to retirement withdrawals,” says Anik Bougie, financial planning and tax practice leader at Professionals’ Financial. It can actually be a valuable asset if you make withdrawals from the savings you’ve accumulated over your career. Here’s how you can benefit from it.
Share income with your spouse
Anik Bougie points out that a good retirement withdrawal plan makes it possible to equalize tax levels over time, but also to equalize taxation between spouses, especially through income splitting.
“Thanks to the TFSA, you can share your income with your spouse by giving them money to invest in their TFSA. This allows you to double the investment in the TFSA, savings that can grow tax-free,” she explains.
She adds that it is possible to use the same strategy for an adult child by paying them an amount to invest in their TFSA. “It’s a great opportunity to support your child and help them take their first steps in managing their finances,” she says.
Optimize payout
When you withdraw your retirement savings, some of them are taxable, e.g. B. RRSPs and unregistered investments with unrealized gains, but not TFSAs. This means that your taxable income will not increase if you withdraw amounts from it.
“Let’s say you have additional financial needs in retirement. If you withdraw these amounts from your TFSA, you will not pay any further taxes because your taxable income has not changed,” says Anik Bougie.
An estate planning tool
In the event of death, it is possible, under certain conditions, to transfer your TFSA to your spouse, just as you would with an RRSP. This means there are no tax implications for the surviving spouse. This will also not affect their TFSA area as the TFSA left to them by their spouse will not reduce their contribution area.
RRSP, TFSA: Which one should be prioritized?
The TFSA is ideal for short and medium-term projects, for example if you want to put money into a project such as buying a car, a trip, a wedding or financing your family’s private school, your children, etc.
For long-term goals like retirement, we’ll tend to prioritize the RRSP, but we can also use the TFSA to avoid increasing our tax rate on withdrawal.
If savings are limited and you cannot maximize both your RRSP and TFSA, this will need to be done on a case-by-case basis and an analysis based on your specific situation. A financial advisor or financial planner can offer you strategies.
Wondering whether you should save in an RRSP or TFSA, contribute to your child’s RESP, or pay off your mortgage faster? The Quebec Institute of Financial Planning’s comparison tool “Pay off a mortgage or save” (https://www.solutioniqpf.org/#, in the “Financial tools” section) can help you determine which would be more advantageous.
GOOD TO KNOW:
· Quick reminder: The TFSA has been around since 2009. To open one, you must be at least 18 years old and a Canadian resident.
· Unlike the RRSP, contributions made are not tax deductible. On the other hand, you don’t pay taxes on income and TFSA withdrawals.
· In 2023, it was possible to contribute $6,500 to your TFSA. In addition, there is the entire unused contribution room from the previous year as well as the amounts withdrawn from the TFSA in the previous calendar year.
· The TFSA is much more flexible than an RRSP: the amounts withdrawn from it recreate a TFSA space for the following year. For example, if you withdrew $1,000 from your TFSA in 2023, you can put another $1,000 back into your TFSA next year.