The annual contribution limit for the tax-free savings account (TFSA) is increasing by $500.
It’s common for annual limits to be linked to an index factor like inflation. The same is true for the annual TFSA contribution limit. It’s an important limit to remember, so to make things easier, the increases only happen when it rounds up to the next $500 increment. That happened for 2019, and the new $6,000 limit is great news for savers and investors.
What does this mean for your clients?
Anyone who’s eligible for a TFSA can take advantage of the tax-planning opportunities they present, regardless of the stage of life they’re in:
- For people starting a new career or those with fluctuating income streams, easy access to funds can be important. A TFSA is more flexible than other registered plans when it comes to withdrawing money, since the withdrawal isn’t taxable, and the amount withdrawn is added to next year’s contribution room.
- For people who’ve moved into retirement, the ways they used to access money can have a significant impact on how much tax they pay and how long their retirement savings last. TFSA withdrawals aren’t included in most income-tested government benefits, so they won’t cause clawbacks of old age security (OAS) or guaranteed income supplement (GIS) payments.
Many of your clients are likely contributing to a registered retirement savings plan (RRSP) and non-registered investments, but it’s possible they haven’t considered how a TFSA can fit into their savings strategy. If clients have never contributed to a TFSA but have been eligible for one since they were introduced in 2009, their total contribution room could be quite substantial.
Check with your clients to help educate them on the benefits of a TFSA, and let them know what they’re missing out on if they’re not using all of their contribution room. Here are a few advantages that can help demonstrate that for them.
Top up retirement savings.
If your clients have already reached their RRSP contribution limit, direct the extra cash flow to a TFSA. The extra savings won’t get them a tax deduction, but the investment growth is still tax-free, and it won’t be taxed when it’s withdrawn.
If your clients retire early, they may not yet be eligible to receive government or workplace pensions. Instead of triggering registered retirement income fund (RRIF) payments or taking withdrawals from their RRSP savings that will be subject to withholding tax, a TFSA may be the ideal way to bridge the gap.
Continue to save in retirement.
If clients are not employed, or not paying themselves a salary from their small business, they’re still eligible for a TFSA without the earned income that would be needed to generate RRSP contribution room.
Continue to save after age 71.
Your clients can’t own an RRSP past the year they turn age 71. They have to convert it to a RRIF or payout annuity or take the RRSP money in cash and pay tax on the lump sum. But they can keep their TFSA open – and continue to accumulate and use their contribution room – for as long as they wish.
Flexibility of TFSAs
“Refill” the TFSA.
Unlike RRSPs, RESPs or any other registered savings accounts, your clients’ TFSA contribution limit isn’t a one-time thing; for example, consider a scenario in which they’ve contributed the maximum to their TFSA and then withdraw $10,000. The following year, in addition to the regular annual contribution limit, they’ll be able to re-contribute that $10,000. (They shouldn’t re-contribute in the same calendar year as the withdrawal, unless they have enough unused contribution room.)
Invest or save.
Some people find the “s” for “savings” in TFSA a bit misleading. That’s because as well as putting their TFSA money into a traditional interest-bearing savings account, they can also put it to work in guaranteed investment certificates (GICs), mutual funds, segregated fund products (also called guaranteed investment funds – GIFs), stocks, bonds, etc.
Carry forward unused contribution room.
If your clients haven’t used up all their accumulated TFSA contribution room, they’re missing out on tax-free growth, but they can still use it in future years. Unused contribution room carries forward indefinitely, so they can contribute later when their cash flow can support it.
Won’t jeopardize their government pension.
The amount your clients receive from OAS begins to be “clawed back” by the government when their income is above a certain level ($77,580 in 2019). But the government formula used for the OAS clawback doesn’t take withdrawals from a TFSA into account, so it won’t count against your clients for this type of income-tested benefit.
Save more for kids’ education
If your clients have already saved enough to maximize government grants for a registered education savings plan (RESP), their TFSA can be a great place to save more for their kids’ education. They’ll pay no tax on the growth within the plan, and there will be no penalties on the TFSA savings if their children choose not to go to college or university.
Save for the unexpected
A TFSA is ideal for letting clients put aside money that they can easily access when things don’t go according to plan. For example, they can use their TFSA if:
- They lose their job or their income is interrupted.
- They incur healthcare costs not covered by government, group or personal health insurance.
- Their home needs emergency repairs or renovations.
- Their car breaks down and they need to replace it.
Save for a special purchase
Saving can feel better if your clients have identified a TFSA as the place where they put money away for a wedding, a trip of a lifetime, or whatever is special to them. Withdrawing from a TFSA can be easy, although clients need to be sure they’ve fully considered the impact it can have on future savings goals.
Contact a member of your Sun Life wealth sales support team to learn more about retirement, tax, estate and financial planning.