3 tips to truly maximize the benefits of a TFSA
Building a summer cash flow fund, or minimizing a pension income gap in retirement—which financial goal would you choose to truly maximize your Tax-Free Savings Account?
First, let’s start things off by stating that there is no wrong answer when it comes to putting money away for your financial goals. As long as you’re doing it, that’s all that matters.
However, when it comes to your TFSA, there are efficient and not so efficient ways of utilizing it.
To ensure that you’re truly maximizing the benefits of a TFSA, here are 3 tips to keep in mind:
Tip #1: Resist using your TFSA to save for short-term goals.
The whole point of a TFSA is to earn as much tax-free investment income as possible. The longer your TFSA has to grow, the more tax-free income you’ll generate. Yet in order for that happen, you need to think of your TFSA as a one-way street (i.e. money goes in, but doesn’t come out). By playing the long game when it comes to your TFSA, versus constantly withdrawing from it, you’ll be putting yourself on a steady path to building wealth.
Tip #2: Invest within your TFSA (instead of just using it as a savings account).
42% of Canadians have a significant amount of money in their TFSA simply sitting in cash. Of course there’s nothing wrong with doing that. It’s very safe. But ‘safe’ doesn’t maximize the earning potential of your TFSA.
That’s where the power of investing comes in.
GICs, stocks, bonds, ETFs, mutual funds—your TFSA can hold a variety of investments.
After all, just because it’s called a Tax-Free Savings Account, doesn’t mean that you only have to use it as a mere storage for savings.
Tip #3: Take advantage of income splitting opportunities.
While there’s no such thing as a spousal TFSA, if you happen to be the higher income earner, you can gift money to your spouse or partner, which they can then use to contribute to their TFSA. Doing this would not only help you to achieve family income splitting, the tax-free nature of the TFSA means that there is no impact on any spousal tax credits (that you as the higher income-earner may be able to claim for your lower income spouse). Although you wouldn’t get a tax deduction as you would with a spousal RRSP, the income earned on money invested in a TFSA is tax-free. Plus you’d be ensuring that both of you are maximizing your annual contribution amounts, boosting your tax-free earning potential in the process.
Keep in mind that as with most tax situations, attribution rules can be somewhat complex (i.e. if your spouse was to later withdraw the money from the TFSA and invest it in something else, you may then be subject to attribution rules). So it’s always best to seek advice from a qualified tax professional.
- Use a TFSA for post-secondary education savings with a difference. A TFSA is another tax-sheltered way to save for your children’s education in addition to a Registered Education Savings Plan, yet with one key difference. With an RESP, part of the withdrawal may be subject to taxation (i.e. earnings and grant money are taxable to the beneficiary)—whereas with a TFSA, they can withdraw any and all funds, tax-free.
- Use a TFSA to grow your nest egg in retirement. If you are retired and living debt-free, you may find that your pension income leaves you with enough extra cash flow to invest. Since you no longer have earned income with which to generate RRSP contribution room (beyond what you’ve accumulated over the course of your career), a TFSA would provide you with a tax-free way to grow your savings in retirement. Plus you can continue contributing to a TFSA even after the year you turn 71 (which is the age cutoff for contributing to an RRSP).The fact TFSA withdrawals are not taxable also reduces the possibility that Old Age Security will be clawed back.
Looking to maximize the many benefits of TFSA, right now? Call on us.
Educators Financial Group has been helping education members make the most of their finances since 1975. Which means no matter where you are on the pay grid, or what your pension income is in retirement, we can provide you with a TFSA investment strategy that works with your specific life stage, timeline, and financial situation.
Let’s talk ‘TFSA’: have one of our financial specialists contact you.
Learn more about the Tax-Free Savings Account by taking our TFSA Master Class:
Lesson 1: Shift your tax-free savings out of ‘park’ to drive higher returns
Lesson 2: How to avoid the over-contribution confusion
Lesson 3: Passing on your Tax-Free Savings Account after you’ve passed away
Lesson 4: Using a TFSA to pay your way, early in your career
Lesson 5: Using a TFSA to live larger and be taxed smaller, later in your career