BY FAZAAD BACCHUS
I continue to see many who are not saving sufficiently for their retirement. One of the major setbacks to saving for your retirement is the misconception that the tax breaks that the Government gives you with one hand it will take back with the other, so then there is no point really. As a result many Canadians find themselves burying their heads in the sand when it comes to retirement planning, hoping that something will eventually work out. This strategy is not a good one.
There is a way that you can save for your retirement if it is your firm belief that you will be taxed at that time and you are opposed to the idea. You can do so with a Tax Free Savings Account –TFSA. This financial instrument was implemented in 2009 and based on total contribution room, by now you could have contributed as much as $41,500 to it.
Tax free means that there is NO tax charged on the interest or on the capital growth. Assuming you have done well in the markets since 2009, you may well be over $50,000 in savings, all of this achieved, by simply utilizing the allowable contribution room for the given year. In any event, if you haven’t done so, you are allowed to bring forward the contribution room for the years that you have missed.
Of course the TFSA also does not have any taxable advantages when you are purchasing, meaning that it does not reduce your taxable income, it is paid with after tax dollars, hence the reason that there are no taxes payable upon withdrawal. Compare a TFSA with an open account, one added advantage is, while both are investments with post taxed income, only the TFSA grows tax free and is also tax free upon withdrawal. On an open account both the interest and growth are taxed.
Personally I don’t believe that it’s a good idea if you are a low income earner (less than $15,000 per year) that you should be investing in RRSP’s over TFSA; you will not really be making the best use of the instruments. This decision though is subject to meeting with a Financial Advisor or an accountant and working out the best course for you.
Upon retirement you can convert your TFSA to other financial instruments where you can also receive a tax free income for life. Unlike the rules of the RRSP where you must convert by a certain age, there are no restrictions or limitations on when you can convert a TFSA to a life time income. Therefore you can fund your pre-retirement as well as or go way past age seventy one if that’s your decision.
A major benefit of using a TFSA is that it does not take any part of your withdrawal and report it as income. This is a significant benefit as it does not then reduce your Government supplements. For example, any income received from a RRSP or RRIF is reported into your income for the given year and can reduce the OAS, GIS benefits. Again if you are a low income person, you may instantly see the benefit of saving using the TFSA.
If you are a high income person, saving by way of a TFSA alone may not be sufficient income for you at retirement and you will need to use the RRSP option and others as well. But the decision of which to use, how much to allocate and where to invest it are decisions that you should talk with a Financial Advisor about. Contact a good Financial Advisor today and start planning your retirement, it’s not too late, neither is it too early.