Tax-Free Savings Accounts (TSFAs) offer a number of advantages to Canadians, and an important one is flexibility. While a Registered Retirement Savings Plan (RRSP) is designed to put aside funds for retirement, a TFSA is a vehicle which can be used to put money aside for any purpose. If you are looking for a way to save for a big ticket item like a special vacation, a car, home or a cottage, putting the funds into a TFSA can be a great choice.
The types of things that a person may want to save money for will vary, depending on his or her own personal goals. A taxpayer can contribute up to $5,000 per year into a TFSA. Any unused contribution room is carried forward, which means that someone who has more income in later years can make higher contributions to his or her TFSA without incurring a penalty.
Withdrawing Funds from a TFSA
Another way that TFSAs are flexible is that funds which are withdrawn from the plan can be replaced later without having an impact on a person’s allowable contribution room.
Here’s an example of how this provision works: Julia contributes $5,000 per year for 10 years into a TFSA and earns investment income on the money held in the plan. Over that time, her TFSA grew to $53,000. She decides to withdraw the funds so that she can start a business. She can withdraw the full $53,000 and will pay no tax on any of the $3,000 earnings. Ten years later, Julia decides to sell her business. She can take $50,000 out of the proceeds of the sale and contribute back into her TFSA without reducing her contribution room which is now at $100,000 ($5,000 a year for 20 years).
If Julia had withdrawn funds from her RRSP to fund her business venture, a certain amount would have been deducted for taxes before it got into her hands. For example, is she withdrew the $53,000 from the RRSP she would have had to include the full amount as income when doing her annual taxes and would have had to pay tax at her marginal rate on the full amount. She may have been able to contribute back the $50,000 to her RRSP if she had the contribution room available, but once the funds are withdrawn, she isn’t able to get that past contribution room back.
No TFSA Spousal Plan
Unlike RRSPs, TFSAs don’t have a spousal plan option. A person can give money to a spouse or common-law spouse to invest in his or her own TFSA, though, and the funds can be withdrawn at any time without being attributed back to the person who provided them. Special rules are in place for spousal RRSPs and the funds must be held in the plan for a minimum amount of time or the contributing spouse will have to pay tax on the amount withdrawn.
TFSAs and Turning 71
The funds held in a TFSA don’t have to be converted into a retirement income plan once a person turns 71. There is no minimum withdrawal requirement, and the plan holder can make withdrawals to suit his or her needs instead.
To find out more about the flexibility of TFSAs and how they fit into an overall financial plan, please contact me to set up a personal consultation. I would be happy to outline your options and recommend a solution which will help you reach your goals.