Many of my clients have heard me say that I think TFSAs might be better understood if they were named Tax Free Investment Accounts (TFIA) because the word “Savings” has led many investors to believe wrongly that only ultra-low savings products like GICs can be used in a TFSA.
The great advantage of TFSAs is that investments can grow and compound without tax on the interest, dividends or capital gains that are earned. As such, most investors are best positioned if they view the TFSA as an important part of their long term investment strategy, rather than a holding tank for their “rainy day fund” or short term savings goals.There is no tax on withdrawals from TFSAs, and on death probate can be avoided if a beneficiary is named. When a spouse is named as the beneficiary (or more accurately, “successor annuitant”), the surviving spouse can maintain the tax-free status of the investments for the rest of their lifetime.
A hidden advantage is that investment earnings inside TFSAs do not contribute to the calculations for Old Age Security (OAS) claw back.
In 2015 the contribution limit was raised from $5,500 to $10,000 and it has since been returned to $5,500 for 2016. Future increases will be made in line with inflation.
At present the lifetime contribution limit for Canadian residents who have been at least 18 years old since 2009 is $46,500. Even with modest growth this means couples can be earning tax free income on over $100,000 of their nest egg. While this may be insignificant for the “one percenters”, TFSAs are now beginning to play a meaningful role for the majority of affluent investors.
Once TFSAs are maximized, affluent investors frequently turn to tax advantaged insurance strategies. One of the most important of these will face new tax rules beginning in 2017. In the next issue of Investment Insights I will highlight these changes.