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10 signs it’s time to catch up on your TFSA contributions

Much more than just a place to stash cash, a tax-free savings account (TFSA) is a versatile vehicle that can help you achieve a variety of financial goals, including purchases, retirement or funding a child’s education.

Here are 10 signs that it may be time to top up a TFSA:

1. You haven’t contributed up to your limit.

You may not have been able to save money during training, while paying off student debt or while getting established. Or perhaps you’ve been saving in your corporation. You can make up for lost time by carrying over any unused TFSA contribution room from the past: Someone who has never contributed to a TFSA but has been eligible to contribute since its introduction in 2009, can contribute up to $75,500 in 2021.

2. You’ve maxed out your RRSP contribution room.

For your RRSP, you can contribute up to 18% of your earned income, to a maximum of $27,230 for 2020. If you earn more than $151,278, you will hit that ceiling. If you’ve already maxed out your RRSP contribution room, contributing to a TFSA is the next best opportunity to boost your retirement savings.  

While you won’t enjoy a tax deduction when you top up your TFSA, withdrawals from it aren’t counted as income. And the investments within a TFSA grow tax-free and can be withdrawn at any time. Furthermore, withdrawals made can be replaced in the following calendar year — TFSA contribution room is revolving. And that’s not the case with RRSP contributions.

3. You’ve maxed out for TFSA contribution room and want to benefit your spouse.

You aren’t allowed to contribute directly to someone else’s TFSA, but you can gift money to your spouse (or common-law partner) so they can contribute it to their own TFSA. Attribution rules don’t apply, which means that any income and capital earned by your spouse in their TFSA wouldn’t be attributed to you as taxable. And your spouse enjoys the full benefit of the tax-free investment growth and withdrawals.  

4. You want to quickly build savings for a rainy day.

As an investment account, your TFSA allows you to seek higher returns, compared with putting cash into a regular savings account at the bank. Within a TFSA, you can invest in a portfolio of qualified assets, such as stocks, mutual funds, exchange-traded funds and term deposits to accumulate income on these assets more efficiently. And as we explained above, the funds can be withdrawn at any time, tax-free.

5. You want to maximize the return on your investments.

A TFSA shelters investments that may bring higher returns, or assets that may otherwise be taxed at a high rate. In a TFSA, you get to keep all the money you earn because you avoid the tax you would normally pay on interest income and capital gains.1

6. You want to cover all your retirement planning options.

TFSA savings can be an important factor in planning how best to draw income in retirement to complement a comfortable lifestyle, post-practice. Money withdrawn from a TFSA is not reportable as income on your tax return, so it won’t trigger clawbacks on benefits such as Old Age Security. Plus, there’s no maximum age limit — you can continue to invest in a TFSA as long as you live.

7. You need to reduce passive income in your corporation.

While many incorporated physicians invest the corporate net income in a corporate investment account, too much passive income may have tax consequences if your corporation’s access to the small business tax rate is eroded or lost. Careful planning can help diversify your savings strategy and allow you to take money out of the corporation, at the right time. It will be taxed in your hands but is then available to contribute to a TFSA.

8. You earn more RRIF or pension income than you really need.

Once retired, based on your age and the federal government’s minimum withdrawal requirements, you may be forced to withdraw more from a registered retirement income fund (RRIF) than you need. To make the most of this surplus, you could invest it in your TFSA, where any growth will be tax-free.

9. You want to leave something to the people who are closest to you.

TFSAs are useful for estate planning, since assets may be distributed tax-free. One way is to name your spouse as “successor holder” on your TFSA, and then they would simply replace you as account holder upon your death. Or you could opt to name any person, any charity or your estate as the beneficiary of your TFSA — just keep in mind that any earnings between the date of your death and the date the TFSA is closed may be taxable. 

10. You just want to invest as much as you can, tax-free.

Contributions to a TFSA are made using after-tax dollars, so you can enjoy unlimited investment growth, tax-free, within it — and that’s unlike any other kind of investment account! Amazingly, only about one in 10 TFSA holders has maxed out their contributions, according to recent Canada Revenue Agency figures, and more than 40% have made no contribution at all.

Your MD Advisor* can help you decide how to best use a TFSA to reach your financial goals related to investments, retirement, tax strategies and estate planning. At MD Financial Management, we’ll approach this as part of a comprehensive plan to make the most of all your savings vehicles — including TFSAs, RRSPs, RRIFs and RESPs (registered education savings plans) — as you move through each stage of your career as a physician.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

1 Withholding taxes by foreign governments may still apply. For example, the Internal Revenue Service in the United States levies a withholding tax on dividends from shares of U.S. companies held by Canadian resident investors.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.