TFSA contribution limits will double once the Canadian federal budget is passed. Will you double your money? I believe the Tax Free Savings Account is the most misunderstood opportunity to save taxes while saving money.
TFSA 2015’s Are Not Just For The Rich
Many times, I have heard people on the street say that only the upper middle class and very wealthy can benefit from a Tax Free Savings Account. Wrong!
Granted, the average person won’t likely be able to deposit $10,000 into a TFSA. But, what if you planned for the replacement of your car when you bought it instead of waiting until you were in trouble? Your TFSA could be just the vehicle.
Imagine you paid $10,000 for a vehicle and you knew you would replace it every 10 years. What if you put $3,000 into your RSP and that generated a $1,200 refund? Put that into your TFSA, add $100/month and it made 5%. After 10 years, you could potentially have almost $17,000. You can take that money to buy your new car. No taxes on the withdrawal.
Now, repeat the process. The rich person might do the same with the $10,000 annual limit and buy a little different car. Bottom line, you don’t have to be rich to benefit from a TFSA.
TFSA’s As A Financial Planning Tool
TFSA’s are a great tool to hold your interest bearing money because that kind of income is 100% taxable. I’ll save the discussion about the difference between capital gains, dividends and income for another day. You should ask your financial advisor about that.
High income earners would be remiss if they are not using a TFSA as part of their financial plan. Many have good pension plans and won’t have much of a reduction in income when they retire. This means their level of taxation won’t decrease and taking money out of RSP’s would actually increase the tax they pay in retirement. By using TFSA’s over time, they would have access to “fun money” whenever they need it for special purchases or maybe for travel without having to worry about increasing their tax liability. The fact that the money may grow over time without taxation is just a further bonus!
I’m not a financial planner and don’t know your situation. This is where you need to involve your financial planner to determine if TFSA’s have a place in your plan.
Will You Double Down?
Realistically, the new limit won’t benefit everyone but everyone should strive to take some advantage of a TFSA for medium term savings. Things like money to fix the roof or replace your car. Those that have the means should really consider taking advantage of the new limits once the bill passes.
Regardless of your financial situation, you should talk to your financial advisor about whether or not a TFSA can benefit you.
Make it a great day!
P.S. What am I thankful for today? I’m thankful for financial advisors. I’m thankful for opportunities to make and save money. I’m thankful for Canada.
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