Managing Your Money

For 2015, the government almost doubled the TFSA contribution limit. This is great news for the small percentage of people who are actually maximizing their TFSA, but somewhat meaningless for the rest of Canadians. In 2009, the government provided us with a fantastic way to save and invest our money, completely tax-free! With this great opportunity to “shelter” money from taxes, why are so few people using it to its full extent?

Let’s talk some basics on TFSAs before we look at some simple strategies. TFSA stands for Tax-Free Savings Account. It’s an account you can open at any financial institution whereby all your earnings will be tax-free. Within that account, you can hold many different types of investments or savings. You can have anything from a savings account to stocks, bonds, and mutual funds, among other things. Consider it as an umbrella, where anything you earn under the umbrella is non-taxable.

TFSAs are very flexible. You can withdraw money from your TFSA account and then put it back in (the next calendar year). WARNING: Before you pull money out or put it back in, know the rules! Because of the flexibility, TFSAs can be used for short term savings, medium term savings, and long term savings. If you have your TFSA at one institution, it’s fairly easy for them to monitor your net contributions, but if you have multiple TFSAs, you’ll have to stay on top of it yourself. Penalties for over contributing can be very costly!

If you have limited resources for saving, you must have a savings strategy. When planning strategies with clients, I always start with the goal. Are you saving for retirement? For a house? Emergency fund? Vacation? Or a combination of goals? Having a goal in mind is not only important to give you direction and motivation in your plan, but it will also determine the investment choices that will make sense for you. It wouldn’t make sense to invest your retirement assets in a savings account, or your emergency fund in stocks.

Once you know why you’re saving, simple strategies can help you to accumulate more efficiently. Monthly, bi-monthly, or weekly saving is usually a painless way to save, whereby you barely notice the money being taken from your lifestyle spending. There are other benefits to this type of saving, such as dollar-cost averaging which lets you benefit from fluctuations in the market. It’s usually very flexible and easy to change should the need arise. Using contributions to an RRSP to generate a tax refund, which can then be reinvested into a TFSA is a way of killing two birds with one stone. Say if you put $18,000 into your RRSP and you are in a 40% marginal tax bracket, you will get a refund of $7,200 which you can then put into your TFSA. So you end up with total savings of over $25,000, but it costs you only $18,000. Another way of maximizing your TFSA is to move non-registered investments into your TFSA (after considering the capital gain/loss implications). Generally, if there is no capital gain, it makes more sense to have your taxable non-registered investments moved to your non-taxable TFSA account. This would have to be re-evaluated each year.

With a limited amount of funds available to commit to your savings, it brings up the RRSP vs TFSA debate. It’s not a simple “one or the other answer”. Another question that often comes up is, if I need money, from where should I take it? Is it better to pull money out of non-registered savings, TFSA, RRSP or RRIF? This is a tricky one, because many factors come into play, such as your taxable income for that year and future years, what type of investments are in the different accounts, capital gains or losses (if any), and the amount you need. An example of this is a lady who recently contacted me. She was in a situation last year where she took a year off work to stay at home and look after her ailing father. With no income she needed to withdraw from her savings, so she took $10,000 out of her TFSA. In retrospect, she would have been better off taking the money from her RRSP. Since she had no other income, she would have paid zero tax and it would have been a great opportunity to get money out of her RRSP tax free.

TFSAs like many other financial and tax vehicles have very specific rules and may have costly penalties associated with them. Make sure you work your TFSA to your advantage by doing your research or getting proper professional advice so that your efforts to get ahead don’t backfire. Your advisor can help you set goals, determine the best type of investments to use, and come up with a plan to fund your TFSA.

Lynn MacNeil, F.PL. is a licensed Financial Planner with Investors Group Financial Services Inc. in Montreal, with 20 years experience working with retirees & pre-retirees. This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide legal advice. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at (514) 693-3384 or lynn.macneil@investorsgroup.com