(Special) – How quickly time flies.
It seems like only yesterday the Tax Free Savings Account (TFSA) came into being in 2009. In ten years the TFSA quickly has become a significant pillar of Canada’s financial and retirement savings system and a popular addition and alternative to the Registered Retirement Savings Plan (RRSP).
Todd Sigurdson, director of tax and estate planning with IG Wealth Management in Winnipeg, says the TFSA has increased in popularity over the last decade. Currently there are about 1,390,000 TFSA accounts with about 10 per cent of them having the maximum amount of $63,500 being contributed.
“Over half of Canadians today contribute to their TFSA, and although the annual contribution limit is not that high, over time they add up and the results can be quite significant if the money is managed well,” Sigurdson said in an interview.
Recent census data shows that almost two-thirds of Canadian households are saving for their retirement. Thirty five per cent are saving through an RRSP, 30.1 per cent through a Registered Pension Plan (RSP), 40.4 per cent through a TFSA and 9.3 per cent through a combination of all three.
The TFSA is a more popular savings vehicle than the RRSP with Canadians in the 15-24, 25-34, 55-70 and 71 and over age categories The TFSA is great for millennials who are starting out in their careers and may not have large enough incomes to get the full tax benefit from investing in an RRSP. Households with a major income earner younger than 35 (40.4 per cent) and those with a major income earner older than 54 (43.1 per cent) are the most likely to contribute to a TFSA.
Canadians in their prime working years between age 35 and 54 are most likely to save in their RRSPs, probably due to the fact that their income is high enough that they can take good advantage of the tax deduction that comes from investing in an RRSP.
The TFSA contribution limit for 2019 recently increased to $6,000 from $5,500 in 2018. With the TFSA limit at $6,000 the total room available in 2019 for someone who has never contributed and has been eligible for the TFSA since its introduction is $63,500.
The annual TFSA dollar limit is indexed to inflation and rounded to the nearest $500. The Canada Revenue Agency’s indexation increase for 2019 is 2.2 per cent. Money in a TFSA grows and can be withdrawn tax free.
Canadians have been contributing to RRSPs since the popular retirement savings vehicle was started some 60 years ago. The newer TFSA has some distinct advantages to an RRSP.
It’s great for people just starting out on their careers and for those who expect to have a significant increase in their salaries in the future. You can put money in and grow it, pull it out without tax and put it into your RRSP when your salary increases to get the tax deduction, and then put the money back into your TFSA at a later date.
As well, withdrawals from a TFSA are not taxed and don’t affect income-tested government benefits such as the Old Age Security (OAS) and some tax credits.
One of the TFSA’s main attractions is its flexibility.
“A lot of people are using it for their retirement but it also has the ability to allow you to access the funds, which makes it a great vehicle to save for both short- and long-term goals,” Sigurdson says. “If you expect enormous growth from an investment, and for interest-bearing investments which are taxed at the highest rate, the TFSA is a great vehicle. Although the exception, there are some $1 million TFSAs.”
Financial experts recommend that people first maximize savings in registered accounts such as the RRSP and TFSA and then start saving in non-registered accounts. There are many options available. A financial adviser can help you choose the ones that are best for you.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2019 Talbot Boggs
Talbot Boggs , The Canadian Press
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