The increase in the tax-free savings account’s (TFSA) annual contribution limit to $10,000 from $5,500 for 2015 will be of tremendous benefit to clients of all ages and incomes — not just the rich who presumably have the funds to afford the additional $4,500 annual contribution.
This initiative will go a long way to achieving the government’s goal, as originally outlined in the 2008 Budget Plan, to permit “over 90% of Canadians to hold all their financial assets in tax-efficient savings vehicles” within 20 years.
As of the end of 2013, almost 11 million individuals had opened a TFSA with a total fair market value of almost $120 billion. Although some may argue that the increased TFSA limit will only benefit the rich, statistics released in last week’s Budget document indicate that the TFSA is a popular savings vehicle for Canadians at all income levels and for all ages.
For example, of the 1.9 million individuals who contributed the maximum amount to their TFSAs in 2013, about 46% were seniors, with 70% older than 55. About 60% of individuals contributing the maximum amount to their TFSAs in 2013 had annual incomes of less than $60,000.
I’ve long maintained that the TFSA is the ideal savings vehicle for taxpayers in the lowest tax bracket. That’s because, as the C.D. Howe Institute concluded in 2003, “for many lower-income Canadians, RRSPs are a terrible investment.” Many government benefits, credits and programs are based on net income and are substantially or even totally reduced as your income (including RRSP/RRIF withdrawals) gets higher.
A second study released by the C.D. Howe Institute in 2010 explored Canadians’ marginal effective tax rates (METRs) upon retirement. The METR reflects not only an individual’s marginal personal income tax rate on an incremental dollar of income, but also takes into account the potential loss of federal and provincial income-tested benefits and credits.
The study concluded that for many people, METRs upon retirement will be higher than working METRs, suggesting that these individuals, given limited funds, may be better off saving in TFSAs than RRSPs.
While higher-income clients are almost certainly maximizing their TFSA contributions, we know of some who never bothered setting up a TFSA in 2009 as the contribution limit was a paltry $5,000. “Why bother?” they said. But with the cumulative limit now standing at $41,000 — and rising by $10,000 annually — we should be making sure that every high net-worth client takes full advantage of the new, increased TFSA limit and catches up on any outstanding contribution room from prior years.