Investors should not overlook the flexibility of a Tax-Free Savings Account.
That’s the view of Todd Sigurdson, director, tax and estate planning, Investors Group, who believes the “real genius” of the savings vehicle is how it can be all things to all people.
This year’s contribution limit is $5,500 and, in contrast to an RRSP, with a TFSA you are not taxed on withdrawals and growth investment income, although you don’t get a tax deduction through your initial contribution.
While the RRSP is still the most preferred way to save for retirement, Sigurdson said there are exceptions.
“For some, the TFSA is the best vehicle for retirement savings and that’s all going to depend upon what your marginal tax rate is in retirement as opposed to what it is during your working career.
“If you are in a lower tax bracket while you’re working and in a higher tax bracket in retirement, which surprisingly does happen for a certain extent of the population, a TFSA is actually the more effective place to put your retirement savings.
“Obviously, if you can, the best strategy is to maximise both your RRSP and your TFSA but for most people that’s not an option, so you do have to make these choices in terms of retirement savings.”
Sigurdson added that where the TFSA comes into its own is because there are no restrictions on when you can access your savings and no penalties for accessing it early.
He said: “So if you want to use it to save up for your first home or a car purchase, or even use it as a vacation account, you can. It’s also a great way to save for your kids’ education.”
Contribution room is carried over each year, meaning if you were 18 years or older in 2009 – when the TFSA was introduced – you have $57,500 of space to put your money. Also, if you make a withdrawal one year, that amount is added to the following year’s contribution limit.
Sigurdson said: “We’re not talking pennies anymore; you can put a sizable investment inside your TFSA. In fact, there are certain people that have used their TFSA and grown in to a significant amount.”
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