Hello;
The TFSA is an important, flexible and versatile part of any financial plan. A TFSA allows any Canadian resident (age 18 or older) to save for just about anything - including retirement - without paying any tax on the growth within the account or on withdrawals. It provides the best of both worlds: growth on savings and the option to withdraw funds at any time should the need arise.1 (Sunlife Investments)
TFSA reminders:
- The TFSA dollar limit for 2021 is $6,000 but there is no deadline for making a TFSA contribution. If you have been at least 18 yrs. old and a resident in Canada since 2009, you can contribute up to $75,500 in 2021 if you haven't previously contributed to a TFSA.
- It's important to know that you will accumulate TFSA contribution room each year even if you do not file and income tax return and benefit return or open a TFSA.
- You can carry forward unused contribution room. If you haven't used all of your TFSA contribution room, it's not a problem. Unused contribution room automatically carries forward indefinitely, so you can contribute later.
- Replacing withdrawals. If you decide to replace or re-contribute all or a portion of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room. If you re-contribute but do not have contribution room, you will have over-contributed to your TFSA in the year. You will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in your account.
- Another note about TFSA withdrawals - when you withdraw an amount in a year, that same dollar amount is added on top of your annual contribution room for the next calendar year.
- What happens to my TFSA when I pass? Provided that you named your spouse or common-law partner as successor holder, they can take over your TFSA after you pass. That's regardless of how much contribution room there is in that person's own plan. So your TFSA would basically rollover into their own TFSA. (it will not affect their own contribution room in any way). The successor holder becomes the new owner of the TFSA, and it stays tax exempt. This also avoids probate fees, which is the tax the government charges to validate your will. That's because the TFSA isn't part of your estate and instead goes directly to your spouse or common-law partner.
Additional thoughts on TFSAs
- Top-up retirement savings. If clients have already reached their RRSP contribution limit.
- Preserve a lower tax rate in retirement. TFSA withdrawals don't count as taxable income, allowing clients to add to their income without increasing their tax bracket. It also won't have an effect on their income-tested federal government benefits.
- Continue to save in retirement. While unemployed, clients are still eligible to contribute to a TFSA without earned income needed to make an RRSP contribution.
- Continue to save after age 71. While there are rules about converting or withdrawing from RRSPs/RRIFs at age 71, investors can keep a TFSA open - and keep contributing to it - as long as they wish.
If you require further information, please feel free to contact us.
Sincerely,
Mike Busby (22-Jan-2021)
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