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In 2009, the Tax-Free Savings Account (TFSA) was introduced by the Canadian federal government. The TFSA is a great option to help Canadians save for long and short term financial goals and the funds can be withdrawn at any time on a tax-free basis.
Unlike a Registered Retirement Savings Plan (RRSP), the TFSA is meant to help you save for any type of general savings needs as opposed to simply retirement. There is no penalty to withdrawing funds from your TFSA whereas withdrawing funds from an RRSP will have resulting tax implications. However, like an RRSP, there is an annual contribution limit. For a TFSA the annual contribution limit is not linked to your income, but rather it is set by the federal government and it is the same limit for all Canadians.
How the TFSA Works
Here is some general information on how the TFSA works:
- Canadian residents age 18 and over can save up to $10,000 (beginning in 2015) a year in a TFSA
- Contributions are not tax-deductible, but investment returns (capital gains, interest and dividends) earned in a TFSA are not taxed, even when withdrawn.
- Withdrawals are tax-free and funds can be used for any purpose.
- Unused contribution room can be carried forward indefinitely. As well, any amount withdrawn from a TFSA can be re-contributed in a future year without requiring new contribution room.
- Neither income earned in a TFSA nor withdrawals will affect eligibility for federal tax credits or income-tested benefits such as the Canada Child Tax Benefit, Old Age Security (OAS) or the Guaranteed Income Supplement (GIS)
- Investments eligible for an RRSP can generally be held in a TFSA.*
Annual Contribution Limits
If you have never contributed to a TFSA before, the contribution limits from 2009 are cumulative. Thus, if you were to open a TFSA today you could contribute a maximum of $41,000.00, and then an additional $10,000.00 per year going forward.
Year Contribution Limit 2009 $5,000.00 2010 $5,000.00 2011 $5,000.00 2012 $5,000.00 2013 $5,500.00 2014 $5,500.00 2015 $10,000.00
Rate of Return Matters
Since the funds held within a TFSA are mutual funds, the better your rate of return, the faster your savings will grow. Please refer to the below charts developed by RBC Global Asset Management for some examples as to how much your TFSA may be worth assuming the contributions are maxed out.
Who does the TFSA benefit?
As you can see from above, the TFSA is a great option (whether you are an individual investor or an investing couple), even if you cannot invest the maximum allowable contribution on a yearly basis.
Thus, the TFSA can benefit the following:
- Young people just starting out: TFSAs will stimulate more savings when starting at a younger age.
- Seniors: TFSAs can provide retired persons with a means to save on a tax-free basis; neither withdrawals nor income earned in a TFSA will trigger clawbacks on Old Age Security (OAS) benefits or the Guaranteed Income Supplement (GIS).
- High Income Earners: Taxpayers who have already made the maximum contribution to their RRSPs will have another tax sheltered savings vehicle.
- Lower Income Earners: Taxpayers in a lower tax bracket may prefer to forgo the modest tax deduction of an RRSP in exchange for tax-free growth and withdrawals of a TFSA.
- Anyone Saving for a Large Ticket Item: TFSAs can be used to fund a car purchase, vacation or down payment on a house.*
In other words, the TFSA can benefits just about EVERYONE!
If you would like more information on TFSAs or would like to open a TFSA, please contact us.
*Excerpt from Mackenzie Investments Flyer. “Introduction to TFSAs.”
**Chart complied from RBC Global Asset Management Charts: Tax Free Savings Accounts – Rate of Return Matters (Individual Investor) & Tax Free Savings Accounts – Rate of Return Matters (Investing Couple).
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Just the thought of estate planning can make some people cringe.
Unfortunately, as much as we hope, we won’t be young and healthy forever and creating an estate plan can help to ensure that your wishes are carried out after you pass away or if you are no longer healthy and require permanent assistance.
There is no time like the present when it comes to estate planning because tomorrow may be too late.
Successful estate planning can happen through following some simple steps.
1: Designate a team of professionals
If you are not a cardiologist, then you probably shouldn’t perform open heart surgery. The same principle applies to estate planning. The easiest way to create an estate plan is to use the experts. Professionals such as estate lawyers, accountants, financial planners and insurance agents are there to help you. They are the ones who keep track of the legal side of estates. It’s their job to help you with the legalities of estates, so use them to your advantage.
2: Draw up a household balance sheet
Understanding your household budget can help you to plan for your estate. By figuring out how long it will take to pay off your mortgage or how much your electricity bill is every month will help you to know how much money your estate will require when you are no longer able to take care of these things yourself. Update your balance sheet when things change so that if someone does need to take over your estate, they will know how much the household costs to run on a monthly basis.
3: Understand your life insurance needs
Life insurance is again a tough topic because it is forcing you to face the reality that one day you are going to die. However, life insurance is the perfect tool to aid in estate planning because it can provide the funds for your estate. It will ensure that there will be the funds required to pay off your mortgage, pay off your debts or to leave a legacy for your children.
4: Draw up your will
A Last Will and Testament is a very important part of any estate. It helps your Executor or Executrix to know how your want your estate to be handled and what your wishes are for your estate. Consult with a lawyer to draw up your will and your chosen Executor(s) know where it is kept and that they are responsible for your estate.
5: Establish a power of attorney for property
If something were to happen to you and you could no longer look after your property, who would you want to do it? For your power of attorney for property, you should choose someone who will be able to make day-to-day decisions easily and, perhaps more importantly, respectfully.
6: Establish a power of attorney for personal care
Who would you trust most to make decisions for you when you are unable to due to medical issues or old age? The person you choose to be your power of attorney for personal care should be someone who knows you well enough to know when you are no longer able to care for yourself. You should be able to trust them to put your best interest above their own.
7: Minimize taxes and administration fees
Taxes are one of the unfortunate necessities of life and even after you have passed your estate will still incur taxes to some degree. Planning for these taxes early on will help you to preserve your estate for children or whoever you plan on leaving your estate to. Planning for the different types of administrative fees (such as: probate, lawyers, property management, etc.) will help to ensure that your estate is dealt with properly and in a timely manner.
8: Keep track of accounts and important information
Keeping all of your account information and important documents in one place will help your Executor(s) to deal with your estate properly. The easiest way to do this is with binders. By keeping your most recent bank account statements, legal documents, life insurance policies, investment account statements or stock certificates in a binder (using a separate binder for bills and/or property management) you not only keep yourself organized by knowing your assets, but it also helps your Executor to know who needs to be contact in the event of your death.
9: Review and update regularly
This step is very important. Every so often you should review your estate plans to ensure that the plan is still relevant. Although estate plans should be reviewed approximately every 5 years, you should look at your estate plans anytime a new life event happens. For example, did you purchase a cottage? Look at your estate plan because now you will need to account for a capital gains tax that probably wasn’t in your plan before. Make sure all your important documents are still in one place and that nothing new should be added or maybe some things need to be removed. Having an up-to-date plan is essential to successful estate planning.
10: Let someone know
Perhaps the most important step of all is to let someone know about your estate plan. What use is an up-to-date binder with your account documents in it if no one knows where to find it. Keep a listing of anyone who needs to be contacted in case of an emergency in the same spot, so whoever you let know about your estate plan will know who they need to get in touch with.
By following these ten simple steps, you are on the way to creating a successful estate plan.