Marketing Monthly | January 2017: TFSA
In this issue:
- Saving for retirement: Choosing between RRSP and TFSA
- What happens to a TFSA after you die?
- How to build a $1-million TFSA
- Why the TFSA needs a new name
Saving for retirement: Choosing between RRSP and TFSA
We all know that we should put money away for our retirement. The message has hit home and fortunately many of us are putting away at least 10 per cent — if not more — of our net income for our senior years. While this is undoubtedly a good thing, there still exists some confusion or lack of understanding about these savings vehicles.
The old standby — registered retirement savings plans (RRSPs) — have been Canadians’ go-to investment strategy for both new investors and seasoned savers. The tax-free savings account (TFSA) was introduced to Canadians in 2009 as an alternative way to save money.
Offering an alternative to the more established RRSP, the TFSA is a vehicle that allows Canadians to save and invest, with the income earned remaining free of taxes. Unlike RRSP funds, money removed from a TFSA at any time is not taxed.
While it may seem like both savings methods offer similar options, viewing both under an “apples to apples” comparison is not valid, as there there are significant differences between the RRSP and TFSA.
What happens to a TFSA after you die?
I have topped up my TFSA to date and my wife has done the same. Returns have been good enough, no problem. The TFSAs currently hold equity mutual funds as part of ‘near balanced’ allocations with a large mutual fund manager. For estate planning and future risk planning (we are both 67), what happens to a TFSA upon death? Is it liquidated and transferred to the survivor as cash? Is it transferred ‘as is’ to the survivor and added on to their plan?
How to build a $1-million TFSA
TFSAs are your ticket to a tax-free $1-million. A small number of investing pros have already built tax-free savings accounts worth roughly $1-million, but the TFSA program is too new for the average investor to be anywhere near that. Patience and perseverance will fix that.
A 30-year-old who starts at $5,500 and makes the maximum annual contribution for the next 40 years could retire with a $1-million TFSA. A 40-year-old who already has a sizeable TFSA won’t make it to $1-million without a lot of ace investing moves, but $500,000 is certainly doable.
Why the TFSA needs a new name
On Jan. 1, 2016, the Tax Free Savings Account (TFSA) turned 7 years old. It’s hard to believe how old it is getting! As a 6 year old, the TFSA did a lot of growing up; it got bigger with more Canadians contributing and it tested its limits. Midway through the year it was promised big things only to have a new boss come in and take them all away. With another year behind it and a new year ahead, it’s time for the TFSA to take new strides.
If we were to ask the TFSA what it wanted for its birthday, we think it would tell us that it would like nothing more than a new name; something less confusing like “Tax Free Accounts,” or “Tax Free Plans.”
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