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Maximize Your Tax-Free Options with TFSAs

Say, “tax-free” too loudly and ears will perk up, heads will turn, and whomever you are speaking with will hone in on you like a hawk spotting a mouse. The phrase, ‘tax-free’ is like music to our ears – and more magical than, ‘abracadabra.’

RRSPs get a lot of R-E-S-P-E-C-T for their tax-free aspects, but the TFSA (or Tax-Free Savings Account) has its own bag of tricks that is as deep as a magician's hat. Properly utilized, this bag of tricks will help you grow your savings exponentially.

What a TFSA Can Do for You

TFSAs were designed to help Canadians save money. But unlike RRSPs, contributions are made with after-tax dollars. That means you won’t get any money back on your taxes if you invest in a TFSA. Instead of sheltering the money you invest from taxes, a TFSA shields your investment income from tax.

Usually, investment income is taxed according to your tax bracket – much like the government would tax your wages. So, $500 in interest or dividends from an investment would be taxed accordingly. However, in a TFSA any interest or other income earned within a TFSA can be withdrawn with any taxes.

What this means for you:

  • Interest, dividends and capital gains earned in TFSAs are non-taxable.

  • Withdrawals are tax-free.

  • Unlike other income, Neither TFSA income nor withdrawals affect eligibility for federal income-tested benefits or credits, such as: old age security (OAS) benefits, guaranteed income supplement (GIS), or employment insurance (EI) benefits, etc.

  • Any money withdrawn can be re-contributed the following year, effectively raising that year’s contribution limit.

TFSAs are Flexible and Tax-Free

Because withdrawals are tax-free, TFSA money is easier to withdraw than most other tax-sheltered investment vehicles. This makes them an incredibly flexible savings account, helping you meet both short and long-term goals.

TFSAs, like many RRSPs, hold a variety of investment opportunities, including:

  • Stocks

  • Bonds

  • Mutual Funds

  • GICS

  • ETFs

Short-Term TFSA Benefits

  • Helps you save for a rainy day – Life doesn’t always go how we want it to, and sometimes we have to dip into our savings to make ends meet, or to comfortably afford that next big purchase. With a TFSA, dipping into your savings has a silver lining – a higher contribution limit next year. And by the time next year rolls around, you’ll be back in a space to save, and last year’s withdrawal will have barely put you back at all.

  • Helps you save for important short-term goals – Why keep your money in a savings account, when you could be generating tax-free interest with it? Whether you have long or short-term savings goals, a TFSA is a great place to park your money, while keeping it easily accessible.

Long-Term TFSA Benefits

  • Helps you save for your child’s education – RESPs are great investment vehicles to save for your child’s future. However, by tying their tax-free status to education, RESPs can be a bit of a liability if your child chooses not to go to college or University. TFSAs, however, leave that choice up to your child. Perhaps they’ll choose to use that investment to become an entrepreneur instead. Whatever they choose, you’re helping to get your loved one off on the right foot.

  • Helps you save for your retirement – If you’ve topped up your RRSP, and still have more money you’d like to save, a TFSA is a great next step for your retirement savings. Take that money you’re getting back on your taxes and put it into your TFSA, for an added boost to your retirement investments.

  • Helps to fund your retirement – If you’re already retired, you’re probably pulling money out of your RRSPs. And if you’re above 71, you are no longer able to own an RRSP (having to convert to an RRIF or Registered Retirement Income Fund, or an annuity payout instead). But don’t let that keep you from enjoying the benefits of a tax-free account. Switch to a TFSA to be more tax-efficient in retirement.

TFSA Limits

As with everything good, there are limits. For a TFSA that means you can only contribute so much money into it per year. Currently the limit for contributing to a TFSA is set at $6,000. It has in the past been set as high as $10,000 (in 2015) and as low as $5,000 (for its first four years. Currently it is indexed to inflation, increasing in $500 increments.

Need Advice on TFSAs? We’ve Got You Covered

A TFSA is a great, flexible way to save, while legally dodging taxes. However, with the added flexibility comes a great many ways to move forward – both good and bad. Properly used, a TFSA can be a powerful tool to help you get what you want, whether that’s a comfortable retirement or a new car. Improperly used, a TFSA can become another account that offers little to your portfolio.

Your choices can be a bit overwhelming, and that’s what we’re here for. Give Bayview Financial a call today. We will help you create a plan that will get you where you want to go.