Don't pay more tax than you have to: Use TFSAs as part of your financial plan

September 25, 2018

A tax-free savings account (TFSA) is more than just a great way to build wealth: As part of a financial planning strategy, a TFSA can help ensure you don't pay more tax than necessary.

TFSAs serve many goals, for now or later

One of the most common myths about the TFSA is that it's only for short-term goals, thanks to the flexibility to withdraw funds, tax-free, anytime. However, TFSAs also offer Canadians versatile ways to minimize tax at any stage of life.

Here are three examples how a TFSA can play a role in investment, retirement and estate planning:

1. It puts time on your side. You can realize the true value of tax-free savings over time when you invest TFSA assets in investments that have more long-term growth potential. These include stocks, mutual funds or exchange-traded funds (ETFs) where interest income, capital gains and dividends can accumulate and grow, tax-free.1

2. There's no age limit. Unlike registered retirement savings plans (RRSPs) that you must convert to a registered retirement income fund (RRIF) or annuity at age 71, there is no age limit on TFSA contributions. You can contribute and withdraw funds throughout retirement. More importantly, withdrawals are not treated as income, and will not reduce income-tested benefits like Old Age Security.

3. Leaves a tax-free legacy. As part of an estate plan, a TFSA allows you to transfer funds to beneficiaries, tax-free. Assets in RRSPs, non-registered investments, or property are deemed to be disposed of upon death and subject to taxation. However, assets in your TFSA at the time of death are not subject to a deemed disposition.

See your TFSA as part of your overall financial plan

We can help you minimize tax and show how a TFSA can better achieve financial goals related to investment planning, retirement planning, tax planning and estate planning.

For 2018, you can contribute up to $5,500 and top up unused contributions, up to $57,500. There's no income tax deduction on contributions, but everything held in a TFSA account can grow tax-free, and be withdrawn tax-free. As funds are withdrawn, you regain contribution room in the following calendar year.

Your MD Advisor can review your financial plan and recommend tax-efficient strategies to ensure you don't pay more tax than necessary, today and in the future.

1 Withholding taxes by foreign governments may still apply. For example, the IRS levies a withholding tax on dividend from U.S. companies held by Canadian resident investors.

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