Here’s an easy question: What’s your RRSP for? I bet you’ll say it’s for the same 2 things everyone else uses theirs for: saving for retirement and tax relief.
Here’s a tougher question: What’s your tax-free savings account (TFSA) for? For many people, that’s not a straightforward question – not because TFSAs aren’t useful, but because you can use a TFSA in so many different ways at different stages of your life.
Maybe it would be helpful to think of your TFSA as your Terrifically Flexible Savings Account.
“Since TFSAs were introduced in 2009, they’ve become a really important and flexible part of many Canadians’ financial plans,” says Sun Life Financial advisor Jim Barnard, RHU, CFP, of J. Barnard & Associate Financial Services Inc. in Owen Sound, Ontario. “I like to talk with every client about TFSAs, because it’s not always obvious how to use a TFSA most effectively.”
Here are some ways you can put this terrifically flexible account to work.
1. Save more for your kids’ education
- Before post-secondary school. If you’ve already saved enough to access the maximum government grants for a registered education savings plan (RESP), your TFSA is an ideal place to save more for your kids’ education. You’ll pay no taxes on the growth within the plan and there will be no penalties if your children choose not to go to college or university.
- During the post-secondary years. Once your children reach age 18 and you’ve already contributed the maximum to your own TFSA, give them money to open TFSAs in their own names. (A word of caution: A TFSA in your child’s name means the child isn’t legally obliged to use the money the way you intend.)
2. Help your kids save for other goals
When school is finished, continue to give your children money to contribute to their TFSAs, with an understanding that the money will be used for a specific goal, such as a down payment for a home or wedding costs. (But again, the child has no legal obligation to use the money the way you intend.)
3. Finance your retirement
- Top up your retirement savings with TFSA contributions, if you’ve already reached your RRSP contribution limit. The extra savings will come in handy some day.
- Retire early. If you retire early, you may not yet be eligible to receive government or workplace pensions and you may not want to start withdrawing income from your RRSP savings. Your TFSA may be the ideal way to bridge the gap, but check with your financial advisor, because efficiently funding early retirement can be tricky.
- Continue to save in retirement. If you’re not employed, or your part-time business isn’t making a profit, you’re still eligible to contribute to your TFSA without the earned income needed to make an RRSP contribution.
- Continue to save after age 71. You can’t own an RRSP past the year you turn age 71. You have to convert it to a registered retirement income fund (RRIF) or payout annuity by the end of the year you turn 71, or take the RRSP money in cash (and pay tax on it). But you can keep your TFSA open – and keep contributing to it – as long as you wish.
- Use your TFSA as a source of tax-free income. Talk to your advisor about how and when this is a good strategy.
4. Save for your parents’ healthcare
If you’re responsible for helping aging parents, a TFSA can be a great way to help them with the cost of healthcare or long-term care. If it looks like your parents will be unable to fully cover such costs, you can use your TFSA — or give your parents money to contribute to TFSAs in their names, if you’ve maxed out the contributions to your TFSA — to help make ends meet.
5. Save for a rainy day
It’s an uncertain world; a TFSA is ideal for letting you put aside money in good times and withdraw it – with tax-free investment growth – in bad. For example, you can use your TFSA in case:
- You lose your job or your income is otherwise interrupted.
- You incur healthcare costs not covered by government, group or personal health insurance.
- Your home needs emergency repairs or renovations.
- Your old car unexpectedly gives up the ghost and needs replacing.
6. Save for a sunny day
Saving can feel better if you’ve identified your TFSA as the place where you put money away for a wedding, a trip of a lifetime, or whatever is special to you.
Other ways TFSAs are flexible
- You can “refill” your TFSA. Unlike RRSPs, RESPs or any other registered accounts, your TFSA contribution limit isn’t a one-time thing. Suppose, for example, you’ve contributed the maximum to your TFSA this year, but then need to withdraw $10,000. (Remembering, of course, that there’s no tax on the withdrawal, whether you’re withdrawing principal, interest or investment growth.) Next year, in addition to the regular annual contribution limit, you’ll be able to re-contribute that $10,000. Just don’t try re-contributing in the same calendar year that you take it out, if you’ve already used up that year’s contribution room.
- You can invest or save. Some people find the “s” for “savings” in TFSA a bit misleading. That’s because as well as putting your TFSA money in a traditional interest-bearing savings account, you can also put it to work for you in GICs, mutual funds, segregated funds, stocks, bonds, etc.
- You can carry forward unused contribution room. If you haven’t used up all your accumulated TFSA contribution room, no problem! Unused contribution room automatically carries forward indefinitely, so you can contribute later.
- You won’t jeopardize your government pension. The amount you receive from Old Age Security (OAS) begins to be “clawed back” by the government when your income is above a certain level ($74,789 in 2017 and $73,756 in 2016). But the government formula that calculates the OAS clawback currently ignores any withdrawals you make from your TFSA, so those don’t count against you as income.
In fact, TFSAs are so versatile, you really need to talk to a financial advisor to ensure you’re getting the most value from all the possibilities of your Terrifically Flexible Savings Account.
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