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PETER DOLEZAL: Tax-free savings accounts: opportunity missed?
Tax Free Savings Accounts (TFSAs) were introduced in 2009. In that first year, about 20 per cent of eligible Canadians opened an account. Despite this fast start, the participation rate today stands at no more than 50 per cent. As of January, 2013, each Canadian over age 18 will be eligible to hold up to $25,000 in a TFSA. Too many of us are missing out on this superb wealth-enhancement opportunity.
A key reason remains a lack of understanding of the program.
Unlike an RRSP contribution, no tax write-off is received when a contribution is made to a TFSA. On the other hand, the compensating factor is no tax liability is incurred from any growth in the TFSA investment. Another beneficial feature of a TFSA is funds can be withdrawn at any time; and should the holder wish, they can be restored either in part or in full in any subsequent year.
For those in a low marginal tax bracket, a TFSA is usually preferable to an RRSP. Use of an RRSP is best left to those in higher tax brackets, to optimize the value of resulting refunds. Since RRSP eligibility continues to accumulate indefinitely, its use can be delayed until higher incomes produce higher tax refunds. In the meantime, the TFSA is a perfect option for those still developing careers and growing their incomes.
As an individual’s marginal tax rate increases, the balance of value shifts from a TFSA to an RRSP. However, for the really thrifty among higher wage earners, the very best option is to fully utilize both RRSP and TFSA eligibilities.
A key myth held by many is that, as the name may imply, TFSAs can be invested only in savings accounts. Funds in a TFSA can in fact be held in exactly the same broad variety of investments as in an RRSP.
The good news for those who have not yet taken advantage of a TFSA? Even if you have not yet opened an account, your eligibility for contributions dates back to 2009 and continues to increase by $5,000 annually, as long as you are at least age 18.
The TFSA is an incredibly beneficial option for most Canadians in the effort to build net worth. Its potential benefit should carefully be considered against the more universally-understood RRSP program.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The SMART CANADIAN WEALTH-BUILDER, is now available at Tanner’s Books, and in other bookstores.