Tax Free Savings Account continues to be a hot discussion topic as investors are trying to figure out how to use it. I have written about TFSA strategies previously as well as a TFSA FAQ section, but every week I continue to get emails about how to use the tax free savings account, well here are some potential ideas for your TFSA account.
TFSA for Retirement
Most Canadians contribute to their RRSP plans to save towards their Retirement goals, and that is what RRSPs are meant for. However the introduction of TFSA can provide a great alternatives for retirement saving.
Unlike the RRSP, TFSA is tax free which makes it great for retirement. You can withdraw from the TFSA on annual bases or enjoy dividend income tax free. But the more important part is that TFSA income is not subject to income test used to calculate OAS clawback. If you are or think will be close to the income threshold then TFSA would be perfect for you as it would not cause any OAS clawback.
RRIF Dilemma
Once your RRSP is converted to RRIF you will no longer be able to contribute to the RRIF and have to take out a minimum amount every year whether you need it or not. If you have other sources of income such as employer pension, you may not need the extra amount but will not have a choice. With a TFSA you can simply contribute the extra amount into your TFSA account, yes you will still pay the tax on the forced withdrawal but at least you can let the investment grow tax free. This may not seem like a big benefit just yet but over the years as you build your TFSA contribution room this strategy can save you hundreds or thousands of dollars in taxes.
TFSA should not be a replacement for your RRSP but a complement to your RRSP and combined you can have a very powerful retirement plan.
TFSA an Income Fund
Although over the short term the low TFSA limit does not leave you with a lot of options, however over the years as you build up your contribution room TFSAs have a great potential to become a tax free income fund. You can purchase strong dividend paying blue-chip companies and the proceeds will be tax free dividends. Over time these dividends can built up and become a large part of your income, tax free income.
The TFSA has a great long term potential and I hope investors take full advantage of it.
Other TFSA Ideas:
Million Dollar Journey Top 4 TFSA Strategies
Canadian Capitalist Ideas for your TFSA
Four Pillars Benefits of the TFSA
What is your TFSA Strategy?
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.