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Taking Advantage of Your TFSA

June 13, 2017

Imagine a future, 20 years from today, where you have a half million dollars in an account that can be used at any point in time, completely tax free. Enter the Tax Free Savings Account.

Twenty years from now, the TFSA will be regarded as the most important savings vehicle and investing account available to investors. The key is to realize this now and act accordingly, rather than to miss out on the power of compound interest.

Now that the available contribution room of the TFSA is $52,000, or $104k per couple, these accounts will soon form the cornerstone of a well thought out, decades-long financial plan.

As a refresher, the yearly schedule of contributions can be found below starting in 2009 – the year the account came into fruition. The contributions can be carried forward indefinitely so those who have not started to contribute have $52,000 available, provided they were at least 18 years old in 2009.

Year Contribution Room
2009 $5000.00
2010 $5000.00
2011 $5000.00
2012 $5000.00
2013 $5500.00
2014 $5500.00
2015 $10,000.00
2016 $5500.00
2017 $5500.00
Total $52,000.00

The magic of compounding suggests that if you were to contribute $52,000, add $6000 per year going forward and experience conservative annual growth of 5%, in 20 years you would have $336,367.21. (PV = 52,000, PMT = 6000, n = 20, i = 5, compute FV)

The same simulation can be done with a more traditional 7% annualized return (closer to the long term average of stocks) where you are left with $472,910.57! (See Appendix A)

That’s nearly half a million dollars now held tax free, where withdrawals can be done at any time with no consequence (bearing in mind that contribution room is not regenerated until the following year). For those investors with a longer horizon than 20 years, the compounding effects are staggering.

If left for 40 years, for instance, using 7%, the result would be $2,285,378.33! All tax free.

Key Attributes and Strategies
1. Provides income for those who are retired. All gains made within it are tax free, and so are withdrawals. Money coming out is not taxed as income, opposed to RRSP or RRIF withdrawals which are. Accordingly, money withdrawn from the TFSA does not count towards clawback for Old Age Security (OAS), which starts at $74,780 in 2017.

2. Funds can be gifted to a spouse, kids, or parents and used as TFSA contributions.

3. Try to avoid investing in GICs or leaving TFSA cash in a form of savings account. This is a common mistake. Since these accounts are tax free, it is most effective to invest with growth in mind to allow the power of compounding to take effect.

4. Currently 50% of capital gains are taxed at one’s marginal rate, but there are rumors that this percentage could increase meaning less money in your pocket from investment gains. This could make the TFSA even more advantageous from a tax perspective, as there are no taxes on capital gains in registered accounts.

Withdrawal and Redeposit Rules

Contribution room does not regenerate until the following calendar year. So, if you make a withdrawal and you have no more extra contribution room, you have to wait until the next year to re-contribute the amount you took out. The penalty for over-contributing is 1% of the excess amount per month.

TFSA vs. RRSP

Everyone’s circumstances are different so there is no one correct answer to the common question of which account is more appropriate, the RRSP or the TFSA. The RRSP is geared towards those in a high marginal tax bracket in order to reduce taxes now, grow savings, and withdraw them in retirement when your income will be theoretically lower. The RRSP can also be effective for those who plan to purchase their first home (Home Buyers’ Grant), or pursue further education via the Lifelong Learning Plan (LLP).

If you have a long time horizon or are in a low tax bracket, the TFSA is very effective because there is no tax or penalty to withdraw funds in the future. There is also the flexibility of withdrawals throughout the life of the TFSA, so this account is appropriate for those of all ages.

A highly recommended strategy is to use both vehicles for saving. A common plan is to have a monthly automatic contribution into one’s RRSP and TFSA, allowing you the benefits from both types of plans.

As of 2015, CRA reported that only 1 in 5 Canadians had maximized their TFSA Contributions. Here at McIver Capital we believe that chasing and catching this contribution room, as well as continuing to maximize it over many years, will help you take advantage of this account that so many investors overlook when building a plan for their financial future.

Best regards,

Matt

Consistently Working In Our Clients’ Best Interest

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

142031$ 252,702.787%$ 270,391.97$7,500.00$ 277,891.97

# Year Account Value Return Year End Annual Contribution* Market Value
1 2018 $ 52,000.00 7% $ 55,640.00 $6,000.00 $ 61,640.00
2 2019 $ 61,640.00 7% $ 65,954.80 $6,000.00 $ 71,954.80
3 2020 $ 71,954.80 7% $ 76,991.64 $6,000.00 $ 82,991.64
4 2021 $ 82,991.64 7% $ 88,801.05 $6,000.00 $ 94,801.05
5 2022 $ 94,801.05 7% $ 101,437.12 $6,000.00 $ 107,437.12
6 2023 $ 107,437.12 7% $ 114,957.72 $6,000.00 $ 120,957.72
7 2024 $ 120,957.72 7% $ 129,424.76 $6,500.00 $ 135,924.76
8 2025 $ 135,924.76 7% $ 145,439.50 $6,500.00 $ 151,939.50
9 2026 $ 151,939.50 7% $ 162,575.26 $6,500.00 $ 169,075.26
10 2027 $ 169,075.26 7% $ 180,910.53 $7,000.00 $ 187,910.53
11 2028 $ 187,910.53 7% $ 201,064.27 $7,000.00 $ 208,064.27
12 2029 $ 208,064.27 7% $ 222,628.77 $7,000.00 $ 229,628.77
13 2030 $ 229,628.77 7% $ 245,702.78 $7,000.00 $ 252,702.78
15 2032 $ 277,891.97 7% $ 297,344.41 $7,500.00 $ 304,844.41
16 2033 $ 304,844.41 7% $ 326,183.52 $7,500.00 $ 333,683.52
17 2034 $ 333,683.52 7% $ 357,041.37 $8,000.00 $ 365,041.37
18 2035 $ 365,041.37 7% $ 390,594.26 $8,000.00 $ 398,594.26
19 2036 $ 398,594.26 7% $ 426,495.86 $8,000.00 $ 434,495.86
20 2037 $ 434,495.86 7% $ 464,910.57 $8,000.00 $ 472,910.57

(*a) Return estimate of 7% based on historical annual return of McIver Capital TFSA as of January 2017. Past results are not a guarantee of future results. Please have a look at our performance attached to this email.

(*b) TFSA future annual contribution room estimated using 2% inflation.

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