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A tax-free savings account (TFSA) is an important, flexible and versatile part of any financial plan. And yet, since the TFSA was introduced in 2009, it’s estimated that only around half of Canadians have opened one.

So why is the TFSA overlooked? Perhaps it’s just not obvious to investors how to use one most effectively. The confusion might come from the way banks often promote TFSAs as a method for short-term savings goals, like a vacation-fund. Or maybe it’s the name? Traditionally, a “savings account” is simply a place to stash extra cash for a rainy day. The name suggests deposits, safety and low interest rates. But as you know, almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into a TFSA, including bonds, stocks, mutual funds, exchange-traded funds, options, etc.

Simply put, 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.

Quick tip: Clients can get started saving in a TFSA by using their income tax refund.

6 ways TFSAs are retirement-friendly

Some of your clients may need to be reminded of what a valuable investment tool TFSAs can be – especially for retirement income.

For those gearing up for retirement, a TFSA can be used to:

  1. Top up retirement savings, if clients have already reached their RRSP contribution limit.
  2. Retire early. When retiring early, some people aren’t yet eligible to receive government or workplace pensions and may not want to start withdrawing income from RRSP savings. A TFSA can help bridge the gap.
  3. Provide income for life. When a guaranteed income product is registered as a TFSA, the client gets tax-free guaranteed income for life – reducing the risk of outliving their money.
  4. 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.
  5. Continue to save in retirement. While unemployed, clients are still eligible to contribute to a TFSA without the earned income needed to make an RRSP contribution.
  6. 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.

Late-comers can catch up

It’s not too late for clients who haven’t been contributing to a TFSA. Eligible clients who haven’t contributed since 2009 now have $52,000 in contribution room – breaking down as follows:

  • $5,000 for each year from 2009 to 2012
  • $5,500 for each of 2013 and 2014
  • $10,000 for 2015
  • $5,500 for each of 2016 and 2017

Start the conversation – i’’s timely!

A conversation about starting a TFSA is timely: clients can consider using their income tax refund to get started.

Consider sharing one of the following articles to help your clients understand how TFSAs could be an important, flexible and versatile part of their financial plan:

To learn more about positioning tax-free guaranteed retirement income using a TFSA and segregated fund products, download this sell sheet.

Click here to contact your Sun Life sales director.

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