The 4 life cycles of a TFSA

This article is published by National Bank as part of a special series surrounding the Royal LePage 1 year mortgage-free Contest, running in Quebec from February 1 to July 31, 2016. Find out more at royallepage.ca/1year.

FROM 18 TO 34 YEARS: FLEXIBILITY FOR YOUNG PEOPLE

For a young adult, it is crucial to build an investment portfolio in anticipation of the major expenses that lay ahead, such as the purchase of a home or a cottage, expensive renovations or starting a new business.

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Investing in a TFSA is an attractive option for the flexibility it provides. A TFSA gives easy access to savings, since withdrawals are not taxed. An RRSP cannot provide the same flexibility. Furthermore, with a TFSA, any amount withdrawn can be reinvested later, without losing contribution room. However, any reinvestments made in a TFSA in the same year as a withdrawal may be taxed: if the amount exceeds the annual dollar limit on contributions, it may be subject to a monthly tax rate of 1%.

Often this time of life is characterized by lower income, since compensation tends to grow as the years go by. A TFSA is particularly appropriate for taxpayers with low or modest incomes, since it allows them to receive all the benefits once they have retired. In fact, most of the people with TFSAs have average annual incomes of under $30,000.

FROM 35 TO 49 YEARS: EASY ACCESS TO YOUR ASSETS

In this period of life, unexpected expenses will often have a major impact on income and lifestyle. The funds in a TFSA can be withdrawn, without penalty, to meet any unexpected financial obligations.

For example, Simon and Maria have been living together for three years. They are both 38 years old, and they have decided to buy a house. Since Maria has owned a condo with her ex-partner, whom she has been separated from for less than five years, neither she nor Simon can participate in the RRSP Home Buyers’ Plan (HBP). However, they have both been investing in a TFSA for several years. More accessible than an RRSP, their TFSA will allow them to dip into savings for their down payment or to pay for moving expenses, tax-free.

FROM 50 TO 64 YEARS: ATTAINING TAX EFFICIENCY

This cycle of life is critical to one’s portfolio holdings. This is the time of life when many factors must be taken into consideration to ensure that assets grow during one’s working years.

Looking down the road, it is a good idea to determine when in your life your tax rate will be the lowest in order to select the most efficient investment vehicle.

For example, if your tax rate during retirement will be lower than it is now, you are better off investing in an RRSP. When the time comes to withdraw these funds, you will be paying tax at a lower rate. Conversely, a TFSA is the best option if you expect your tax rate to be higher in retirement.

65 YEARS AND OLDER: SOLUTIONS THAT IMPROVE YOUR POSITION

A TFSA is an ideal tax solution for retirees. Not only are withdrawals not taxed, but this type of vehicle also has no impact on the amount of benefits received. This is not the case with an RRSP, since withdrawals are included in total income for tax purposes.

A TFSA also provides retirees with more control over their finances after the age of 71. Unlike an RRSP, a TFSA has no requirements on conversion into retirement income. Furthermore, there are no minimum annual withdrawals from a TFSA.

A TFSA IS NO SUBSTITUTE FOR AN RRSP

As in any good financial portfolio, diversification is essential in registered investment vehicles. If your RRSP is intended solely as a way to pay for your retirement, there are several other reasons for having a TFSA, so it is important to find the right balance, depending on your situation.

ABOUT RRSPS

RRSP contributions generate income tax deductions, but withdrawals are recorded as income and taxed at the current rate.

ABOUT TFSAS

TFSA contributions do not generate tax deductions, but the funds will not be taxed on withdrawal.

TFSAS AT A GLANCE

  • A TFSA is not a product; it is an investment vehicle.
  • Like your RRSP, it is essential that the rate of return from the investments held in your TFSA offsets the loss purchasing power from inflation.
  • Savings are always better invested in a TFSA than in a current account.
  • From 2009 to 2012, TFSA contributions were limited to $5,000 per year. The limit was $5,500 per year for 2013 and 2014. It rises to $10,000, beginning with the 2015 tax year.
  • The minimum age for contributing to a TFSA is 18 years.

If you have any questions or would like to learn more about strategies tailored to your specific situation, feel free to contact or make an appointment with the mortgage development manager dedicated to your office. He or she will be pleased to help.

The contents of this article are provided for information purposes only, and are not comprehensive. They do not create any legal or contractual obligations for National Bank or its affiliates. For information on your financing options, please consult your National Bank real estate specialist.

© 2015 National Bank Canada. All rights reserved. Any reproduction in whole or in part without the prior written consent of National Bank of Canada is strictly prohibited.

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