We are so proud to be part of our community and so proud that they embrace us as well. The small town we call Hespeler has grown and evolved so much over the last few years and we want the knowledge of the residents to grow and evolve as well. In this months issue of Hespeler Village Magazine David is sharing some facts about a commonly confusing investment vehicle: the TFSA.
TFSA: A Most Misunderstood Investment Vehicle
I’m not sure who named the TFSA, or Tax Free Savings Account, but they should be punished. OK, maybe not punished, but it is very misleading to consider a TFSA as just a savings account. It is NOT just a savings account, but rather it is a powerful vehicle for investing. The vast majority of Canadians have misused this opportunity and either left their money in a savings account or put it in GICs.
Generally, the types of investments that are permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP). This would include:
- Cash
- Mutual Funds
- Segregated Funds
- Securities listed on a designated stock exchange
- Guaranteed investment certificates
- Bonds
- Certain shares of small business corporations
A properly managed TFSA Account can be used for so much more than just a savings account. For example, let’s assume you want to earn $500 a month in passive income and you are wondering what it would take to get there. If you maximize your TFSA contribution at $5,500 each year, then assuming there are no capital gains and a yield of 5%, you will reach $124,616 in 15 years. Assuming it continues with a 5% return, that is $519 a month of passive cash flow and it’s tax free.
For many Canadians $500 a month would cover a car lease, groceries for a month or the cost of utilities. That is only assuming a 5% return and no capital gains growth.
None of the income, growth and losses that occur with a TFSA will impact the owner’s income or tax position at all. When an investment makes money in a TFSA, the owner does not have to declare the gain on their income tax return. Withdrawing from the TFSA will also not impact your Old Age Security income amount. The amount withdrawn is not added to income, and therefore will not cause any of the OAS to be clawed back.
If you have withdrawn funds from your TFSA in the previous year, you can deposit the same amount in the next year. As an example, let’s say you originally deposited $5,000 and let it grow to $6000 and withdrew that. The the whole $6,000 can be deposited the year after it was withdrawn, not just the original deposit.
Upon death, the assets in your TFSA can be transferred to your spouse without affecting their existing TFSA or contribution allowance. The surviving spouse ends up with assets that are tax sheltered and those assets will be passed on to their estate or beneficiary without tax as well.
And finally, you can use a TFSA to help build additional retirement savings in addition to your RSP or pension. You should consider using your TFSA as an extension of your retirement funds.
Talk to your financial advisor as to how to best use a TFSA in your financial plan.
David Reeve is President of Davlyn Financial Services Inc., an award winning, family owned and operated financial planning firm in Hespeler. He can be reached at david@davlynfinancial.com.
