Saving in a TFSA at every stage of life

Whether you have recently entered the job market, are saving up to buy a house, want to maximize your contributions before you retire, or have started withdrawing your savings to enjoy your retirement, a tax-free savings account (TFSA) can be a valuable investment vehicle.

A TFSA can be an excellent savings vehicle, especially for short- or medium-term projects. Here are two key advantages to using a TFSA:

• Your investment income is not taxable.
• The funds can be withdrawn at any time and are not taxable.

Here are a few scenarios to help you understand the main ways you could use your TFSA effectively at different stages of your life.

01 The start of your career

At the start of your career, the transition from school to the job market is a period of adjustment in terms of managing your personal finances. While it's normal not to have any clear long-term plans when you're young, that shouldn't stop you from starting to save. There are many advantages to starting early. To help you contribute to your TFSA, you can set up automatic withdrawals from your bank account.

For instance, Silvia wants to buy a used car next year. She thinks she'll need $7,500 to make it happen and has already saved $3,000 in a TFSA. To make sure she saves the remaining amount on time, she's signed up for pre-authorized withdrawals to contribute $375 per month. In 12 months, she'll have saved up $4,500, a tax-free amount that she can use to buy her car.

A TFSA can also be a good way to save at the start of your career, when your income is lower. Because your tax rate is lower, your tax deductions are not as advantageous if you invest in a registered retirement savings plan (RRSP). You could save your RRSP contribution room for when your tax rate is higher and prioritize your TFSA instead.

02 Becoming a homeowner

Start by saving in a TFSA

When planning to buy their first home, many people think about saving up for a down payment in an RRSP because of the benefits of the Home Buyers' Plan (HBP). However, you might be better off saving your money in a TFSA instead, especially if your income is lower and your RRSP deductions are not as significant. As with an RRSP, your income will be sheltered from taxes, but when you withdraw funds from your TFSA, you don't have to report them.

Transferring your money to an RRSP

Once you're earning more money, you can transfer funds from your TFSA to your RRSP. Then you can take advantage of tax deductions to maximize your savings and put together a down payment faster through the HBP.

For example, 22-year-old Mathias begins his career with an annual income of $39,000. He wants to save for a down payment on a house. He decides to invest $2,500 in his TFSA at a 4 percent annual rate of return, in addition to contributing $250 each month. After five years, he manages to save up just over $19,000. Mathias is now earning $90,000 a year, and his marginal tax rate has risen from 26,5 to 36,1 %. He opts to transfer his savings from his TFSA to his RRSP to reduce his tax bill and be able to withdraw this money later on through the HBP. His RRSP contribution results in a tax refund of about $6,859¹ (at the time his taxes are filed) that can be added to his down payment or used to cover other home-buying expenses.

Note, however, that by choosing the RRSP+ at the Fonds, it could be more advantageous for Mathias to make use of the 30 percent in additional tax credits² right from the start in order to build up his down payment for a home, which he couldn't do with a regular RRSP. That's why it's important to determine whether this strategy is right for your situation.

03 Family and savings projects

You can also use your TFSA to save up for long-term projects. To do so, you could use your TFSA to invest in products that have the potential for higher returns, while still respecting your risk tolerance.

Investing in your family members' TFSAs

If you've reached your TFSA's contribution limit, you could gift funds to a family member so that they can contribute to their TFSA. Gifting funds to your spouse would increase both your tax-free investments. If you have an adult child, you could do the same thing, so that they, too, can reap the benefits of a TFSA. In either case, there are no tax implications for you.

04 The end of your career

As you approach retirement, it may be worthwhile to make an extra effort to ensure you have enough savings to meet your needs once you stop working.

To increase your retirement capital, you can use your TFSA to invest in products that have a greater yield than a simple savings account, giving you a higher investment income that remains tax-free over the long term.

For example, Philip has invested $5,000 per year in a balanced TFSA investment fund with a 4 percent annual return over 10 years, rather than leaving it in his TFSA savings account with a 1 percent annual rate of return. As a result, he has increased his retirement capital by more than $10,031.

05 Retirement

RRSP or TFSA?

As you approach retirement, is it better to maximize your RRSP or TFSA? The answer depends primarily on your projected tax rate at retirement. If you estimate that your tax rate will be higher at the time of withdrawal than at the time of deduction, it may be more advantageous to opt for a TFSA: the withdrawals you make from this savings vehicle will have no impact on the taxes you pay during retirement and will not affect your Old Age Security payment amounts, for example. To make an informed choice, it's a good idea to consult a financial planner.

Using a TFSA to boost your government benefits

On or before December 31 of the year you turn 71, you'll have to transfer your RRSP to a registered retirement income fund (RRIF). The following year, you must withdraw the mandatory minimum amount, which will be considered income. However, if your income exceeds a certain threshold, you'll lose some of your Old Age Security or Guaranteed Income Supplement benefits. Investing in a TFSA instead of an RRSP could therefore allow you to avoid this cutback, while reducing your tax bill once you retire.

 
While there are pros and cons to a TFSA, as there are to an RRSP, it's still an indispensable savings tool. It all depends on where you're at in life and what your goals are. There's no one-size-fits-all recipe for optimizing your investment strategy, which is why a financial planner is still the best person to help you strike the right balance, while taking full advantage of a TFSA.