As the TFSA reaches a major milestone early next year, the savings and investment vehicle continues to grow in importance for Canadian investors – both in terms of its prominence in financial planning and in the amounts of assets now held in those accounts.
“The only excuse for not having a TFSA is that you actually have no money,” says Jamie Golombek, managing director, tax and estate planning, with Canadian Imperial Bank of Commerce’s financial planning and advice group in Toronto. “There’s no downside [to contributing non-registered monies to a TFSA]. You’re getting tax-free income for life.”
On Jan. 1, 2019, the TFSA, which was announced in the 2008 federal budget, celebrates its 10th anniversary. In 2009, the annual contribution amount was set at $5,000.
Over the years, the total assets held in TFSAs have grown. According to recent data provided by the Canada Revenue Agency (CRA), there was about $233 billion held in TFSAs at the end of 2016, the most recent year for which the CRA provides statistics. About 13.5 million Canadians held at least one TFSA, and there were a total of about 18 million TFSAs held by the end of 2016, the CRA reports.
“The amount of money in the plans is now significant,” says Golombek, who adds that seeing clients who have maxed out their TFSA contributions annually, invested those contributions and have TFSA balances in the $80,000-$90,000 range is common. “As a [financial] advisor, you ignore TFSAs at your peril.”
Furthermore, the federal government has raised the annual TFSA contribution limit to $6,000 for 2019 from $5,500. Annual TFSA contribution limits are indexed to inflation and rounded to the nearest $500. As a result of the increased contribution limit for 2019, the cumulative contribution limit next year will be $63,500 for investors who have never contributed to a TFSA and who have been eligible since 2009.
Perhaps more appealing for investors than the TFSA’s growing contribution room is its flexibility, suggests Myron Knodel, director of tax and estate planning with Investors Group Inc. in Winnipeg. There are no forced withdrawals or tax consequences when amounts are withdrawn from a TFSA, unlike for an RRSP. (RRSPs must be converted to a RRIF or an annuity, or collapsed, when the RRSP accountholder reaches the age of 71.)
“Recognizing that I’m going to have to withdraw [money from my RRIF] in my retirement years, which will increase my income and therefore possibly reduce my government benefits [such as old-age security and the guaranteed income supplement], perhaps the TFSA is a better alternative [for me and other investors],” Knodel says. “A lot of that [thinking] has been driving the migration, to a certain extent, in [investors’] interest from the RRSP to the TFSA.”
For investors who have the money, maximizing both their RRSP and their TFSA makes the most sense, Golombek says, noting that for high-income earners, the TFSA has become another plan, in conjunction with the RRSP, for long-term retirement savings.
For middle-income earners, Golombek adds, the TFSA is the preferred way to save for a big financial goal, such as a car purchase or the down payment for a home: “We’re seeing the TFSA being used in conjunction with the RRSP’s Home Buyers’ Plan.”
For retirees, the TFSA allows for continued tax-sheltering of money past the age of 71, when RRIF withdrawals are mandatory.
“At a certain point, RRIF minimum amounts can become more than you want to take into income in a year,” says Vince Murton, vice president of longevity planning at Raymond James Ltd. in Toronto. “The TFSA is an opportunity to offset part of that [tax hit]. You can take this money you didn’t want to take out of your RRIF and put it into your TFSA.”
In some cases, Murton says, the TFSA ultimately ends up being the second-largest pool of assets left in someone’s estate, after a home, because assets held in a RRIF are ground down gradually through mandatory minimum withdrawals.
“Typically, you want to spend non-registered money [before that held in] a TFSA,” Murton says. “So, in some cases, the TFSA is the only [savings vehicle] that continues to grow.”