What to do with your TFSA (before Trudeau trims it)

The writing is on the wall for the $10,000 TFSA

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Well, it happened. The Liberals have won a majority, and now it’s time for Justin Trudeau to make good on all the party promises he made—including his pledge to trim the annual Tax-Free Savings Account (TFSA) contribution limit from $10,000 to $5,500, starting in 2016.

For many Canadians, that raises some questions. Such as: What should you do with your TFSA in the meantime? Should you scramble to top up your TFSA today, in case it shrinks tomorrow? And how will this affect my savings goals?

Relax. You can top up your TFSA when and if you can and put that money to work for you by investing it wisely. If it means waiting until next year, don’t sweat it. Trudeau is unlikely to tamper with contribution limits retroactively. To date, any adult over the age of 24 has accumulated $41,000 of tax-sheltered contribution room, and that’s not going to change. In 2016, it’s still likely to grow to $46,500 (as oppose to $51,000) with the promised changes.

Even if the Liberals had pledged to claw back the extra $4,500 in contribution room afforded to Canadians this year, savers wouldn’t have been penalized for it, Keith MacIntyre, national tax practice leader at Grant Thornton LLP, told Advisor.ca.

“There is no tax on withdrawal,” he said. “People aren’t going to face any tax burden for it.”

And while the loss of the $10,000 annual TFSA will cost high-income earners who can afford to top it up each year (they’d be able to net $53,700 more on your investments over 30 years at the current limit), it won’t affect their wealth by nearly as much in the short term, says Graham Westmacott, portfolio manager at PWL Capital in Waterloo, Ont.

Assuming a 5% return and 30% tax rate, the difference in actual tax savings per year would be less than $70, he told Advisor. “No one’s going to be retiring a year later or selling a yacht based on the TFSA change.”

The TFSA may not turn out to be quite as powerful a wealth building machine as many of us would have hoped, but it’s still a force to be reckoned with. There’s no other savings vehicle in the country that allows Canadians to grow their money tax free and access it any time without penalty. It’s especially advantageous to lower income Canadians because, unlike the Registered Retirement Savings Plan (RRSP), contribution room is not contingent on earnings; all Canadians have the same allowance.

Of course, if you’ve already maxed out your TFSA, good for you. You’ll want to find other tax efficient ways to invest your money. There’s always RRSP which offers a tax-deferred rebate on contributions or, if you’re investing in a non-registered account, consider Canadian dividend-paying stocks which are given preferential tax treatment.

 

25 comments on “What to do with your TFSA (before Trudeau trims it)

  1. Perhaps he would change his mind if millions of us tweeted him asking him to do so?

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    • Good luck with that. All Justin wanted was your vote, not your opinion. CD

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  2. Canadians can donate their TFSA’s to Trudeau so he can win another election and put more tax increases and new taxes, fees etc. plus raise our cost of living by carbon taxes, carbon pricing, cap and trade etc. and lower our living standards some more.

    I made some real, accurate calculations and every average $50,000 income earner in Canada just from the higher annual C.P.P. contributions and TFSA rollback by $4,500 will cost them $1,300,000 over 40 years. The younger workers in their 20’s and early 30’s plus their family, kids, even those that have not been born yet are going to pay big time and they don’t even know it. It is very sad indeed.

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    • Well as long as you made the calculations REAL and ACCURATE we can be rest assured all variables were taken into account. The average 50,000 income earner is not maxing out their TFSA unless they are extremely thrifty. The new benefits also specifically target that salaries marginal tax rate, in addition to families and kids with lower incomes will benefit greater from the proposed child benefit changes.

      Post how you came to such a number, I sincerely doubt it is accurate, but rather a worst possible scenario assuming that person would max out their contribution of the TFSA every year and get a decent return over 40 years.

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      • I earn ~$25000/year, & just maxed out my $10000 TFSA contribution, not ten minutes ago, soooo…

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        • Out of curiosity, how did you manage to do that? Was the contribution from your income alone or did you have other souces of funds (inheritance/monetary gifts/etc)? I’m finding it difficult to max out my TFSA on a $50k/year salary and I’m not a frivilous spender! With $800/month rent, cell phone bill of $100/month, Car insurance of $200/month, groceries being $400/month, Life insurance, renter’s insurance, pet insurance, pet food, gas/oil changes, internet, emergency savings contributions, among some other things I’m not left with much money after each pay cheque! And I don’t have any debt at all! How do you manage to save so much? I’m genuinely interested and hope to learn something! Thanks!

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    • Justin Trudeau couldn’t understand your calculation because he was a school drama teacher. sadly, many blind minded people just wanted to hear good promises, free stuffs giving away during the campaign and they voted for that.

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  3. Although unlikely, what happens if the next session of parliament doesn’t reconvene until 2016? Will we be able to sneak in another $10k before they likely announce a cut in the throne speech?

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  4. Look, I’m not rich by any means; we just scrape by. My husband and I both have one of these accounts; we see it as a good savings account. The bank takes $25/mo from each of us, and puts the money there. It takes 24 hours to get it out, so it makes you think twice whether or not you _need_ to dip into it – but you’re not punished otherwise for doing so. I don’t see where people think this is for the rich, and I don’t know why Trudeau wants to take the $10,000 limit (brand new) and drop it back down to about where it was. Sure, I’ll never cap it; I think I have all of $175 saved up. P Either way, this is not going to affect me … it just looks like Trudeau wants to look like he’s “socking it to” the rich people, when, really, he may well be socking it to the working class, or poorer people who wish to try to make a secure nest egg that doesn’t involve a lot of confusing banker’s gobbdlygook that covers the fact that someone else is getting more benefit out of your money than you are.

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    • most working class, like you, havent utilized the full amount which is exactly why he is really taking it just from the rich who can. How is that a bad thing? why complain about something that admittedly doesnt even affect you? just for the sake of complaining. I for one am giving him the benefit of doubt that he might very well be great for our country.

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      • What you aren’t getting is that this doesn’t only affect the rich. With the extra 4500 a year most young people would be able to grow their investments only in a tfsa instead of having to use rrsp’s. And you wouldn’t notice the room difference until later in life when it starts to compound and you’re earning more at your job so you can contribute more. The difference over 30 years is about $53,000. Times two people in a family is $106,000. Taxed at about 30% when you retire would mean an extra 35 grand in your pocket if you put into tfsa instead of rrsp. That’s an extra year of retirement funds. Plus the fact that you have access to that money at any time without penalty. What if you came into a large sum of money, through inheritance or another means. You could invest it in your tfsa instead of sticking it in an rrsp or low interest savings account. Bet you’d be wishing for the extra room then. How can more room be bad, and it’s not dependent on how much you make, like rrsp’s are. We all get the same amount. It’s just the govt taking away from you even if you don’t use it. Then circumstances put you in a postition you never thought would happen and NOW you need it, but oops it’s gone you’re SOL. What next they’ll tell me how many times I can flush my toilet a day, I know it’s coming. haha

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        • the_tripp….if you are going to compare TFSAs and RRSPs and complain about the tax at withdrawal of the RRSP you must also account for the tax SAVINGS from the RRSP up front. Otherwise, you are not making a relevant comparison.

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    • You really pay the bank $25 for each of you to put your money in TFSA for you? LOL, if you can use TV remote control, you can deposit money online for FREE, I mean FREE, Nada.

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      • She didn’t say she paid the bank..she said that the bank deposits $25.00 to each of their TFSA’s every month from their bank account..

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  5. Maybe the 2016 maximum will only be bumped up $1000 to $42000. Before the Harper raised it, the 2015 limit was $36500 and he raised it $4500 to permit a $10k contribution for the year. If the Liberals are adamant we are not to benefit from increased room they may take the extra $4500 permitted in 2015 and only add $1000 for 2016 because if the limit wasn’t raised in 2015 the max contribution room available in 2016 would have been $42k.
    That being said, i don’t believe it will be that complicated and we will be allowed $5500 more as of Jan. 1 2016 for a total of $46500.

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  6. A 5% return? What are you putting in your TFSA? An extra $4500 tax free to shelter would have a large, beneficial impact on the ability of Canadians (especially young, and lower income Canadians as well as those nearing retirement) to provide for themselves, especially in view of the fact that outside of the public sector defined benefit pensions are gone.

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  7. I am by no means wealthy yet I manage to max my TFSA every year by budgeting and paying myself first. I do not make RRSP contributions as I cannot afford both and have a decent pension plan. The “why” Trudeau is scaling it back is obvious, more money for the government. What they are not talking about is the use of TFSAs by many Canadians as short term savings for purchasing large ticket items. Scaling back the TFSA limits risks higher consumer debt or less spending, both detrimental to our economy which seems less important to Trudeau than the tax revenues gained.

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  8. Stefania, why do you not mention Corporate Class mutual funds in a non-registered account?? The tax deferral and tax savings of these investments are little known or understood. Many of your readers would benefit from their use if they are looking for options beyond their maxed out TFSAs!

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  9. I thought the idea behind the TFSA was to encourage Canadians to save for their retirement, thus relieving the government of the obligation of financially supporting seniors who are classed as poor. For the very small short term gain by the government by reducing the allowable contribution to a TFSA, there will be the long term cost of governments onus to financially support future seniors. Everyone seems to be gung-ho about taxing the rich – does anyone ever ask why they are rich? Usually they sacrificed and planned their life, so we want to penalize them for that and reward the non planners?

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  10. I like Trudeau to make TFSA contribution limit to go down as income rises following the formula of the Roth IRA. Withdraws should carry a 10 percent penalty if withdrawn before the age of 59.5 years old, etc.

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  11. It’s all about education, or, sadly, lack of education on financial matters. I must take issue with the sentence from your article “There’s no other savings vehicle in the country that allows Canadians to grow their money tax free and access it any time without penalty.” Since the 1980s there has been just such a tax sheltered savings vehicle that the wealthy, and politicians, and those who are properly educated have used to great benefit.

    That would be an “insurance tax shelter”, better known as Universal Life. As a financial planner and life licenced agent, you can call me biased. So be it. The facts speak for themselves. A Universal Life policy combines life insurance with investments, in a tax sheltered environment. The contributions are not tax deductible, have higher limits than current TFSA rules, and can be withdrawn tax free, under the right circumstances.

    Some in the industry claim that you should buy term insurance and invest the difference outside of the insurance policy. In some cases that is the best recommendations. But these investments are open to taxation and may not grow as fast as tax sheltered savings. They can also be attacked by creditors, and go through public probate on death. Many other benefits are included that a TFSA simply does not have.

    Enough said. I just can’t understand why the public, and Canadian MoneySense writers, are unaware of all the options available to Canadians? Once people are educated, they are fully capable of making informed decisions on their own.

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  12. Trudeau is trimming back the TFSA but we have to pay for his two nannies.

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    • And Trudeau’s 30,000 Syrian refugees, 1000 live in hotels in Vancouver free for a year. They get free $15 for breakfast, $20 for lunch, $25 for dinner.

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  13. Give people a chance to breath. The govn’t taxes people to their bones and the TFSA gives us a room to giggle, now they squeeze it.. Harper’s purpose was to put the money aside for the kids university education fund. Everage earners don’t worry that much b/c their kids can apply for loans and bursaries. If high earners have extra cash, good luck to them, they work had with their brains and because they studied hard, they deserve their reward, the game is for everyone. We can’t compare their hard discipline work ethic with average Joe 9-5 job and few beers after work and say it’s not fair.

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  14. The poor can add $500 in TFSA, the rich can add $100K, I think 10K is in between. Many people have million dollars plus in the bank by the time they are 45 to 50 years old, and many people are broke. A guy I know he and his wife have good paying jobs but live in debt because their daily dinners are like having a feast, they stay in high end hotels on vacation, shop till they drop. Mean while I still hunt for bargain on craiglist. You can’t compare apple and pear and say, it’s not fair.

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