Recently, while having dinner with friends, the subject of TFSA’s (Tax Free Savings Accounts) was raised. My friend’s partner quipped “What’s the big deal. It’s only $5,500 per year and it’s not even tax deductible”.
While those observations are correct, the greatest attribute is you can re-contribute all your withdrawals over and above your contribution room!
To date, if you contributed your maximum since the TFSA’s inception in 2009, you would have deposited $36,500. Now imagine that amount being worth $50,000 today as a result of market gains over the last 8 years. You could withdraw that whole $50,000 right now and – pay down your mortgage, do a house reno, put a kid through college, top up your RRSP (and get a tax deduction!) etc. – and not pay a nickel of tax! Sure, your $36,500 was after tax but the gain of $13,500 was completely tax free!
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Next year, in addition to your new $5,500 contribution, you can deposit $50,000 back into your TFSA! Imagine how much faster that will grow and in another few years you can do the same thing again!
For those in a lower tax bracket, a TFSA may make more sense than an RRSP. For middle income earners, in addition to their RRSP, a TFSA may make more sense than paying down a low interest mortgage. For high income earners, maxing out TFSA’s and RRSP’s is always a good plan.
The point here is not to dismiss this very effective financial planning tool just because “it’s only $5,500 per year and it’s not even tax deductible”. Oh yes, and don’t forget to talk to your advisor.