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Game changer for investing if the TFSA limit is doubled
Apr 10, 2015
Contributors : Moshe Milevsky, a finance professor at York University, Dan Hallett, a principal with Oakville’s Highview Financial Group and Cindy Crean Managing Director of Private Client services at Sun Life Global Investments.
In the next couple of weeks we will find out if the government will double the TFSA limit probably when Finance Minister Joe Oliver delivers the budget.
This will help Canadians save more and it is not just for the “rich”.
Maybe you won’t be able to use all the contribution room but the option is there.
Moshe Milevsky reminds us that any future government can reverse this as tax laws are rewritten all the time and rarely stay the same for long.
Here is a closer look at the implications.
a) RRSP vs TFSA : With a TFSA your money has already been taxed and anything inside grows tax-free. With an RRSP you get tax back now and pay tax when you withdraw the money in retirement.
If you expect your tax rate to be lower in retirement than it is now, an RRSP makes more sense says Cindy Crean. If you think it will be higher, a TFSA is better. A bit of both may work also if you are intending to use the money soon to purchase a house or something other than retirement and how easy it is to get the funds.
b) If you’re 25+ : You probably can’t save the present limit of $5500.00 so doubling it to $11,000.00 won’t make much difference for now.
The advantage goes to TFSA because you may need the money for a down payment or if you go back to school.
At 25 it is best just to put money away and it doesn’t make a huge difference where. If you are not as disciplined you may opt for RRSP as it is harder to get out says Dan Hallett.
c) If you’re 55+ : Older workers have taken to TFSAs in a big way as they didn’t have it for most of their working life. The finance department says 71 per cent of Canadians maxing out their TFSAs are over 55. The CRA says the age group with the most accounts is over 75.
After age 71, you can’t contribute to an RRSP . With the increased limit for a TFSA it offers a better place to shelter money for yourself and your heirs.
d) For high incomes : The RRSP is the best choice if your tax rate is higher now than when you retire. If you have no more RRSP room the TFSA higher limit is a plus. This also goes for those with good pensions. They may not have much RRSP room, so a higher TFSA limit helps.
e) For low incomes : TFSAs are better than RRSPs because the money does not count as income for tax purposes. If you receive the Guaranteed Income Supplement (GIS) money inside a TFSA doesn’t count as income while money taken out of an RRSP does.
Low incomes are unlikely to use the extra room but there may be a one time event – inheritances or other one time situations where they could utilise the extra room and not hurt their entitlement.
If this measure is in the budget it offers a way to save a little more. Your circumstances will decide what you do.