The Learning Centre:
3 tips to truly maximize the benefits of a TFSA
From building a ‘summer fun fund’ to padding your pension income in retirement, a Tax-Free Savings Account is a great investment vehicle to get you saving for your financial dreams and goals.
Here are 3 tips to ensure that you’re truly maximizing all of the investment benefits that a TFSA has to offer:
TIP #1: Income-splitting.
Are you higher on the pay grid as well as being the top earner of the household? Consider using a TFSA to take advantage of income-splitting opportunities.
For example, if you were to contribute funds to your spouse’s TFSA, as the lower income-earner, your spouse would not have to pay tax on any investment income or capital gains they earn in the account.
Plus unlike a non-registered account, income attribution rules will not apply to the spouse who provided the funds (I.e. you). Not only would this possibly help you achieve family income-splitting, the funds in the account obviously accumulate tax-free, so 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). 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.
If you’re lower on the pay grid and your spouse is the higher income-earner, then maximize all the same benefits above by having your spouse provide the funds to contribute to your TFSA.
TIP #2: 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 (RESP), 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.
TIP #3: Boost your pension income 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 pension income 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 (OAS) will be clawed back.
Looking to maximize the 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 and financial situation.
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
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.