TFSAs Are Good For Seniors
There are many benefits of having a Tax-Free Savings Account (TFSA). TFSAs allow money to grow tax-free and are suitable for all Canadians but may be especially important for seniors.
A TFSA is not like a Registered Retirement Savings Plan (RRSP) where money grows tax-deferred instead of tax-free. TFSAs are truly tax-free, no matter how long investments are held and how much they grow.
For example, if Susan invested $20,000 in stocks within her TFSA and it doubled in value to $40,000, she would withdraw the entire $40,000 tax-free. She could also choose to buy different stocks, mutual funds or GICs within the TFSA. Any way you slice it, there is no tax owing on money earned in a TFSA.
In the first year or two of existence for TFSAs, some people felt the potential tax savings generated from a $5,000 annual contribution was insignificant and decided not to open one. These days, the TFSA contribution limit for a person who has never invested in one is $57,500, and the annual limit has been raised to $5,500.
Higher limits can make TFSAs very beneficial for seniors who supplement their income from their investments. For example, if Jim invested $57,500 into securities that pay 5 per cent annually he would receive $2,875 of interest or dividends. If those investments were held in a regular account, the income would be subject to taxation, but because the investments are in a TFSA, the income would be earned tax-free.
In addition to creating tax-free income, TFSAs can help seniors preserve certain income-tested benefits. This is because the income earned within a TFSA does not have to be reported to Revenue Canada. Therefore, seniors who receive income-tested benefits or programs such as the Guaranteed Income Supplement (GIS) or BC Fair PharmaCare can help keep their taxable income low by using a TFSA.
Perhaps the most common income-tested benefit is Old Age Security (OAS). Those whose net income exceeds $75,910 in 2018 will have some or all of their OAS benefits clawed back. Utilizing a TFSA to tax-shelter some of their income-paying investments can help people avoid this issue.
How to contribute
Many seniors would like to contribute to a TFSA but aren’t sure where they will get the money. Commonly, seniors will find the answer in their RRSP accounts.
For example, Nancy lives off her pension and over the years has amassed $100,000 in her RRSP. The funds in her RRSP are not needed to supplement her lifestyle but are earmarked for vacations and large purchases instead.
Nancy is now at the age where she will have to convert her RRSP to a Registered Retirement Income Fund (RRIF) and start taking withdrawals from the account. On $100,000 Nancy would have to take $5,280 as income at age 72. Nancy could choose to direct the funds to her TFSA as a contribution, in the form of cash or an existing stock or mutual fund in-kind. That way, she wouldn’t have to sell and re-buy an investment she likes. The investment would continue to grow tax-free within her TFSA.
This is a good strategy because it gives Nancy a way to get money into her TFSA without negatively impacting her lifestyle.
There are many ways to take advantage of a TFSA no matter what your age or financial situation. For seniors the advantages are many, including the potential for lower taxable income and the preservation of income-tested benefits. If you are wondering how to best use a TFSA for your personal situation, speak to your financial advisor or accountant who will be happy to assist.