It has been less than a year since the TFSA was created by the Federal Government and we are already generating a completely new set of strategies with this new tax saving tool. I just came back from a financial planning class where we got a few additional facts and tricks to be used with a TFSA.
The TFSA mixed with the HBP
Don’t we love acronyms? The TFSA, HBP and RRSP can now team up to efficiently create a healthy down payment when buying your first home ;-D
Instead of contributing directly into your RRSP and then use the Home Buyer’s Plan (you can see a very nice description of the HBP over @ Million Dollar Journey), you should now consider using your TFSA first.
Accumulating cash down for a property may take a few years. If you start accumulating at a young age, you may not earn much and your tax rate is usually lower. Therefore, it would a better idea if you start accumulating money within your TFSA.
Then, once you are close to purchasing your property, withdraw from your TFSA investment to contribute into your RRSP in order to trigger a higher tax return. You can now benefit from the HBP by withdrawing from your RRSP (after waiting more than 89 days), you receive a nice tax return and you just created additional space in your TFSA (assuming you made money with your investments). Isn’t that great?
Parents can help boost your TFSA
It can be even better if parents want to help. As there are no tax implications with the TFSA, no attribution rules either. As such, parents can fully contribute to their children’s TFSA (starting age at 18) and nobody will ever get taxed on the investment return 😀
When should you die?
When considering the best timing for death, I would choose January 2nd. In this way, my estate would benefit from an additional 5K to invest in my TFSA (which will be rolled over to my wife). Your estate liquidator will be able to use your previous year’s income to contribute to your RRSP as well. Since we all have to die one day, I reserved my date already 😉
Creating contribution room or avoiding high tax investments?
There is a big debate about the TFSA with regards to its usage. Should we invest in bonds and CDs since they become tax free (instead of being taxed in the highest tax bracket) or should we invest in the stock market in order to create additional contribution room upon withdrawal?
I say it depends on your goal. If you do not plan on using your TFSA funds for several years, you may want to invest in the stock market and hope for the best. On the other hand, if you want to buy a house in 12 months, you might consider safer investment products such as bonds 😉
The TFSA was created for poor people in the first place
Did you know that the TFSA was created to protect poor individuals? At retirement, all sources of income are calculated when it comes time to decide if you are entitled to receive additional subsidies from the government or to know if you qualify for tax credits.
So, if you withdraw a 2-3K per year from your 20K RRSP, you may pay up to 50% in taxes (considering the loss of tax credit and additional government support). This is why transferring money from your TFSA to your bank account can be very interesting for low income individuals.
So, this is what we had looked at during our TFSA class… Do you have any other strategies you want to share about your TFSA?
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