D Smith: New tax planning strategy offers many options
Tax Free Savings Account (TFSA), is the newest tax planning strategy available to Canadians.
TFSAs have clear advantages when used properly.
There is an annual limit of $5,000, and this plan has been available for three years. Canadians over age 18 now have $15,000 of accumulation room.
Let’s compare a TFSA with a non-registered savings account. Contributions to both plans are made with after tax dollars.
You can hold similar types of investments in both plans.
The TFSA allows tax-free earnings on investments held under this structure. The non-registered accounts return is taxed.
Capital gains, dividend and interest income earned in a TFSA is not included in taxable income, and future withdrawals do not incur any tax. When choosing the type of investment to put into a TFSA, remember tax rates vary on different types of investments.
Capital gains receive the most preferred tax treatment, followed by eligible dividends and then non-eligible dividends.
The least tax efficient income is interest income.
Money withdrawn from a RRSP or RRIF is taxed as income in the year received.
A general guideline is to utilize a RRSP when a client’s tax rate is higher now than the expected tax rate in retirement.
You should compare a TFSA, a non-registered account and a RRSP as part of your financial plan.
Should you put your TFSA into an interest bearing savings account?
Most Canadians have parked their TFSA in a savings account earning minimal interest, because they have been told by their financial institution that is what to do. This may not be in your best interest.
As a Certified Financial Planner and as a TFSA owner, I believe most people are not utilizing their TFSA investment choice to their own advantage.
I have not parked my TFSA in a low paying savings account. I reviewed my asset allocation, longevity and cash flow.
My TFSA is in a growth type of investment. Many financial institutions charge fees on their TFSA accounts, why should you pay a fee to withdraw your own money?
You should work with a financial institution that does not charge fees on their TFSA accounts.
You can transfer your TFSA from one financial institution to another using a government transfer form provided by your financial advisor.
If you parked your TFSA in a savings account earning minimal interest, you can transfer to a dividend or growth oriented investment at a different financial institution.
TFSAs will eventually produce higher account balances since taxes do not have to be paid on an annual basis on the investment growth.
Instead of contributing to a TFSA annually, another option is to purchase life insurance to substantially increase an estate value. Joint last-to-die life insurance is a very effective estate planning tool.
A couple age 65, with a joint-last-to die life insurance policy of $350,000, can pay an annual premium less than their TFSA contribution.
This insurance strategy can increase their estate value many times over. Choose your TFSA wisely!
Doreen Smith is a Certified Financial Planner with Capri Wealth Management and Manulife Securities Investment Services Inc. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc
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