Assante Hydrostone’s blog and news updates.

Is a Tax-Free Savings Account Right For You?

Published on: November 30th, 2020

Canadians are missing the opportunity of investing in their Tax-Free Savings Account (TFSA). In fact, many people do not understand the big differences between the Registered Retirement Savings Plan (RRSP), despite most agreeing both are crucial to their savings strategy.

Canadian studies published in early in 2020 shows 27 per cent of Canadians do not understand what distinguishes a TFSA, a Tax Free savings account that allows Canadians to earn tax-free investment income, from an RRSP, Retirement savings account a tax-deferred retirement savings vehicle in which contributions are tax deductible.

The prevalence of that knowledge gap exists despite the majority of Canadians having both accounts and not knowing the true benefits of the TFSA.

“Most Canadians have a mix of short-term savings goals and long-term planning goals, so investing in both TFSAs and RRSPs is often a good solution,” Glenn Stewardson, Instructor with Joyful Retirement Seminars.

In our education webinars people ask all the time about how they use a TFSA to help reduce their taxable income for the following year — even though TFSAs do not work that way. Contributions to RRSPs, on the other hand, are tax-deductible.

“The power of the TFSA is revealed in our ‘Joyful Retirement Course’. It is wonderful to see the light in people’s eyes as they begin to understand how to use the TFSA” Stewardson says. When we review the benefits of the TFSA compared to the RRSP. It will be important to review your own personal marginal tax rate to assess whether an RRSP or TFSA is going to be best for you.

“If you decide to contribute to TFSAs, be mindful of your total Contribution Room and when you’re going to make use of your contributions. If you deposit and withdraw to many funds during the year you may trigger a penalty with Canada Revenue Agency, CRA. This is 1 per cent per month of overcontributions. Not a good plan” he said.

When people invest into their TFSA all the Growth, Dividend and Interest are tax free inside the TFSA. That means no tax slips while the money is invested in the TFSA and then no tax slips on the withdrawals from your TFSA. This is great news for retirees who are trying to keep below the Old Age Security claw back threshold. When it comes to saving for specific goals, speaking to a financial advisor to determine whether it was more ideal to use your TFSA or an RRSP.  When saving for Retirement or future income planning you could use either and both the TFSA and RRSP.  The best options for you, will be determined with a Written Financial Plan to outline your goals.

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