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TFSAs: a Flexible Savings Plan for Canadians

Written on March 26, 2012 at 3:57 am, by admin

Tax-Free Savings Accounts (TSFAs) offer a number of advantages to Canadians, and an important one is flexibility. While a Registered Retirement Savings Plan (RRSP) is designed to put aside funds for retirement, a TFSA is a vehicle which can be used to put money aside for any purpose. If you are looking for a way to save for a big ticket item like a special vacation, a car, home or a cottage, putting the funds into a TFSA can be a great choice.

The types of things that a person may want to save money for will vary, depending on his or her own personal goals. A taxpayer can contribute up to $5,000 per year into a TFSA. Any unused contribution room is carried forward, which means that someone who has more income in later years can make higher contributions to his or her TFSA without incurring a penalty.

Withdrawing Funds from a TFSA

Another way that TFSAs are flexible is that funds which are withdrawn from the plan can be replaced later without having an impact on a person’s allowable contribution room.

Here’s an example of how this provision works: Julia contributes $5,000 per year for 10 years into a TFSA and earns investment income on the money held in the plan. Over that time, her TFSA grew to $53,000. She decides to withdraw the funds so that she can start a business. She can withdraw the full $53,000 and will pay no tax on any of the $3,000 earnings. Ten years later, Julia decides to sell her business. She can take $50,000 out of the proceeds of the sale and contribute back into her TFSA without reducing her contribution room which is now at $100,000 ($5,000 a year for 20 years).

If Julia had withdrawn funds from her RRSP to fund her business venture, a certain amount would have been deducted for taxes before it got into her hands. For example, is she withdrew the $53,000 from the RRSP she would have had to include the full amount as income when doing her annual taxes and would have had to pay tax at her marginal rate on the full amount. She may have been able to contribute back the $50,000 to her RRSP if she had the contribution room available, but once the funds are withdrawn, she isn’t able to get that past contribution room back.

No TFSA Spousal Plan

Unlike RRSPs, TFSAs don’t have a spousal plan option. A person can give money to a spouse or common-law spouse to invest in his or her own TFSA, though, and the funds can be withdrawn at any time without being attributed back to the person who provided them. Special rules are in place for spousal RRSPs and the funds must be held in the plan for a minimum amount of time or the contributing spouse will have to pay tax on the amount withdrawn.

TFSAs and Turning 71

The funds held in a TFSA don’t have to be converted into a retirement income plan once a person turns 71. There is no minimum withdrawal requirement, and the plan holder can make withdrawals to suit his or her needs instead.

To find out more about the flexibility of TFSAs and how they fit into an overall financial plan, please contact me to set up a personal consultation. I would be happy to outline your options and recommend a solution which will help you reach your goals.

TFSA 101: Tax-Free Savings Account Basics

Written on March 19, 2012 at 3:40 am, by admin

A Tax-Free Savings Account (TFSA), is a great way to save for your financial goals throughout your lifetime. In your early years, a TFSA might be ideal to save for that down payment on your first home or maybe to start a new business. Overtime these goals may change. Travel, retirement or other life events may be the priority. Regardless of why you’re saving, the flexibility and tax-free growth TFSA’s offer make them ideal for just about anyone.

TFSA’s Offer Two Main Benefits

1. Tax-free Growth: Regardless of the type of investment you put your TFSA contributions into they will all grow tax free. This of course, will help you to build your savings faster and achieve those financial goals.
2. Tax-free Withdrawals: Anytime you need to take money out of your TFSA you can without paying any tax. This flexibility makes TFSA a good vehicle to save for short and long term goals.

Quick Facts

• As of 2009, any Canadian 18 years of age or older with a social insurance number can open and contribute $5000 annually to a year to a TFSA.
• Your unused contribution room can be carried forward indefinitely.
• If you make any withdraws to your Tax-Free Savings Account, you can put the money back into the TFSA but only in the following calendar years.
• Your withdrawals can be made tax-free
• Your withdrawals have no affect on your ability to receive government benefits
• Unlike an RRSP, your contributions are not tax deductible
• And any capital losses cannot be claimed
• Excess contributions to your TFSA are subject to taxes, interest and penalties.
• You can name your spouse or common-law partner the beneficiary of your Tax-Free Savings Account without any impact on their existing contribution room.
• You can have one or many TFSAs. Regardless of how many you have, you cannot exceed the contribution limit.
• You can transfer your TFSA between financial institutions.

Need a Bit More Information?

How much can I contribute to my TFSA?

• Your annual limit is $5,000
• Plus your unused TFSA contribution room from prior years
• Plus any withdrawals from TFSAs made in the prior years

Unused TFSA Contribution Room

If the full $5,000 is not deposited into a TFSA each calendar year, the unused contribution room is carried forward. A person who is opening a TFSA for the first time in 2012 can contribute up to $20,000 into the plan ($5,000 for each year from 2009-2012). The TFSA accountholder is entitled to contribute another $5,000 to the plan as of January 1, 2013.

A plan holder who withdraws money from the TFSA can redeposit it into the plan in future years. Here’s an example of how it works: Jennifer has $10,000 in a TFSA. She withdraws $5,000 from her plan in 2012. In 2013, she would have the standard $5,000 contribution limit and an additional $5,000, which she can contribute to her plan at any time. You cannot however, contribute back into your TFSA in the same calendar year as the withdraw was made. So if you withdrew $20,000 of TFSA contributions in April of 2012 you could not contribute the monies back in to the plan until 2013.

Investing Options for TFSAs

An advantage to opening up a ‘self-directed’ Tax-Free Savings Account is that plan holders have a number of investment options to choose from – all of which can grow on a tax-free basis:

• Mutual funds
• Individual stocks
• Guaranteed Investment Certificates (GICs)
• Bonds

How to Open a TFSA

Someone who wants to open a TFSA can get started by contacting their financial advisor. Or feel free to send me an email at rhonda_sherwood@scotiamcleod.com or call 604-661-1532. I would be happy to answer your questions and help you get started with your TFSA.

The Bottom Line

A TFSA is a great way for anyone to save for their financial goals without worrying about taxes eating away at their monies.

How to Avoid Unnecessary Taxation to my RRSP or RRIF When I Die

Written on March 12, 2012 at 5:00 am, by admin

contact meYour registered funds are an important financial asset, and so it’s essential to understand what happens to them when you pass away. With proper estate planning there are ways that you can pass on your assets to your beneficiaries while minimizing any taxes payable on it.

Choosing a Beneficiary for your RRSP or RRIF

When planning for what happens to your RRSP or RRIF when you pass away, the first thing you will need to do is to choose a beneficiary who will receive the money from the plan and unless you name a ‘qualified’ beneficiary the full value of your registered funds will be subject to tax.  In other words, the full value of the registered funds will pass on to the named beneficiary while the estate will be liable for the taxes owed.  Since the estate owes the taxes, other beneficiaries of the estate might receive a reduced and unequal amount. So plan carefully.
So who is considered a ‘qualified’ beneficiary? That would be your spouse or common law spouse, a financially dependent child or grandchild who are under the age of 18 or a financially dependent child or grandchild with a physical or mental infirmity.
In most cases, it makes sense to name your spouse or common-law spouse as the beneficiary. This way, your RRSP or RRIF can transfer to their registered plan on a tax-deferred basis. Your spouse will only then pay tax when he or she makes withdrawals from the plan.
This holds true, if you name your financially dependent child of any age who has a physical or mental infirmity. They too will receive the monies on a tax-deferred basis and again, will only be subject to tax and at their personal tax rate when withdrawals are made.

However, if you are naming as beneficiary your financially dependent child or grandchild (under the age of 18), the assets will still pass on to them on a tax deferred basis but the funds will have to be used to buy an income producing annuity. The child or grandchild will receive annuity payments but will not be able to access the full amount of the funds until he or she is 18. And again, a tax liability will only occur when payments under the annuity are made and will be taxed at the child or grandchild’s personal tax rate.

Unfortunately, there is no tax deferral benefit for naming adult children who do not have a disability (physical or intellectual).  Even if they are still living at home and are financially dependent upon you.

Naming any beneficiary of your registered funds will still avoid probate fees. Unless of course, the beneficiary is your estate in which case the probate fees will be applied.
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Now if you don’t name a beneficiary, the funds in your RRSP will automatically become part of your estate and will be subject to income tax and probate fees (in British Columbia).

There are a number of factors to look at when considering what happens to your registered funds when you die. The decision you make can have a significant impact on your beneficiaries’ financial situation, as well as the amount of tax which will need to be paid out of your estate. Please feel free to contact me to help you find the right solution for your personal situation.

What You Need to Know About RRSP Carry-forwards

Written on March 5, 2012 at 6:00 am, by admin

Do you find the term “RRSP carry-forwards” confusing? If so, you’re not alone. A Registered Retirement Savings Plan (RRSP) is a way for taxpayers to put money aside which can provide a source of income later in life, as well as get a tax deduction now. The “carry-forward” part of that term simply means that taxpayers have some flexibility in the amount they contribute to their plan and when they use the tax deduction they are entitled to for making that contribution.

RRSP Carry-forward for Unused Contribution Room

For each year that you earned income, you have a set maximum which you can contribute to your RRSP. Not everyone contributes the full amount that they are entitled to into their retirement savings plan each year. This is not a situation where if you don’t use it you’ll lose it, though; any unused contribution room is simply carried forward to future tax years indefinitely.

If you have a year where your income is higher than in previous years or your expenses have gone down, you have the option of taking the extra money and putting into your RRSP. One way you can contribute to your RRSP and take advantage of your unused contribution room is to take your income tax refund and contribute it to your plan. That way, you don’t have to try to find a way to make more money to use for retirement savings, and you get a tax deduction for the amount that you deposit into your RRSP.

The amount of your unused RRSP contribution room is listed on the Notice of Assessment you receive from the Canada Revenue Agency each year. You can also find out the amount of your unused RRSP contribution limit by signing up for My Account on the Canada Revenue Agency website. Once your account has been activated, you will be able to view this information online.

RRSP Carry-forwards for Undeducted Contributions

The other type of RRSP carry-forward that you can take advantage of is for undeducted contributions. What this means is that if you didn’t take the deduction for your RRSP deduction on your income tax return, you can use it later on.

Why would you choose not to take a tax deduction that you are entitled to right away? If your income will be higher in later years, you can use the deduction to reduce the amount of income tax you are required to pay. Contributing to your RRSP now means that you can get the power of compound interest working for you sooner and end up with more money available to you when it’s time to retire.

Tax matters can be complicated and it can be challenging to figure out how much you should be be contributing to your RRSP each year and when you will get the maximum benefit from the deduction on your contribution. If you have questions about the right strategy for your tax situation, make an appointment with a qualified financial planner for assistance.

3 Common RRSP Myths and Misconceptions

Written on March 1, 2012 at 2:01 pm, by admin

Having a good financial strategy is an essential part of preparing for a comfortable retirement. Contributing to a Registered Retirement Savings Plan (RRSP) should be part of the plan. Unfortunately, there are a number of RRSP myths and misconceptions which can get in the way of taxpayers getting the maximum benefit from these long-term savings accounts. How many of these have you heard of, and are they interfering with your retirement plans?

Myth #1: I can only contribute to an RRSP in the year I earned the income.

The amount that someone can contribute to an RRSP is based on his or her previous year’s income, so your earned income in 2010 is what your 2011 RRSP contribution is based on. However, you also have up until February 29, 2012 to make your 2011 RRSP contribution. This idea can be a bit confusing.

Dianne earned income in 2010 and has an RRSP contribution limit of $20,000 for 2011. If she contributed $10,000 to her plan in 2011 and another $10,000 between January 1-February 29, 2012, she has the option of claiming the entire $20,000 on her 2011 tax return or using the latter $10,000 on her 2012 income tax return.

Myth #2: RRSP contributions can’t be carried forward.

Many taxpayers do not make their maximum allowable RRSP contribution each year. It can be difficult to find the funds to save for retirement when paying day-to-day bills and expenses must be the priority. The federal government has changed the contribution rules so that taxpayers don’t lose their unused RRSP contribution limit. It can be carried forward and used later on, when the taxpayer has more money to put toward retirement.

If Sue has a $20,000 RRSP limit in a certain year and only contributes $5,000 into her plan, the other $15,000 is carried forward and added to her contribution room the next year. Sue would be able to contribute up to $35,000 into her RRSP the following year ($15,000 carried forward and $20,000 in new contribution room).

There may be times when taking the RRSP deduction may not make sense, even if you made a contribution in a particular year. If you know your income is going to be higher in the future, you can hang on to your RRSP deduction and use it then.

Myth #3: Contributing to a spousal RRSP means I can deduct twice as much each year.  

Spousal RRSPs can be a bit tricky to understand, and it would seem to make sense that contributing to someone else’s plan means that you can use their annual contribution limit as well as your own. Unfortunately, this is not the case and no matter whether your put money into your plan or your spouse’s RRSP, you can only use your contribution room to do so.

If Kate has a RRSP contribution limit of $20,000 for the year, she can put this amount into her own plan or make a contribution to her husband Bill’s RRSP account. Either way, Kate gets an income tax deduction for the amount of her contribution. If Bill earned money in the previous year, he could also make an RRSP contribution to his plan.

Now that you see how these 3 common RRSP myths and misconceptions have been debunked, make a point of getting tax your advice from a qualified financial advisor who can provide advice about your personal situation.

Spousal RRSPs: an Investment Tool for a Comfortable Retirement

Written on February 20, 2012 at 2:05 pm, by admin

A spousal RRSP is a savings vehicle where one spouse makes a contribution to a plan opened in the other spouse’s name. It allows couples to split income in retirement so that each person has a similar amount of income. This strategy helps to lower the income tax the couple pays in later years.

When Spousal RRSPs Makes Sense

A spousal RRSP makes sense in situations where one person earns significantly more than the other. It can be considered in a situation where one spouse is earning and the other one is at home caring for children. Spousal RRSPs can also be used in situations where both spouses are working but there is a significant difference in their respective incomes.

In a situation where both spouses approximately the same amount, a spousal plan is not the best option. Instead, each spouse should be making contributions to a personal plan in accordance with his or her RRSP limit. The amount that each person can contribute to a RRSP is listed on the Notice of Assessment issued by the Canada Revenue Agency (CRA) each year.

Opening a Spousal RRSP Account

When a couple decides to open a spousal RRSP, the account is opened in the lower-earning spouse’s name. The spouse with the higher income would make contributions to the plan, up to his or allowable RRSP limit each year. The contributing spouse would also receive the tax deduction for the amount deposited into the plan.

If the lower-income spouse has an existing RRSP account, it can be used for this purpose. However, once the higher-income spouse makes a contribution to the lower earner’s plan, the entire amount held in the investment account is considered to be a spousal RRSP.

The spouse whose name appears on the plan is its legal owner. He or she will be responsible for the taxes payable on funds withdrawn from the plan, subject to the attribution rules.

Income Tax Act Attribution Rules

The Income Tax Act includes attribution rules to ensure that taxes payable on assets transferred from one person to another are collected appropriately. In the case of a spousal RRSP, the rules require that withdrawals made from a plan in the same year the contribution was made or the previous two calendar years is treated as income for the contributing spouse.

The funds deposited into a spousal RRSP should be treated as a long-term (minimum of three years) investment. If any or all the funds are withdrawn before that time, the higher-earning spouse will lose the tax advantage of contributing to the plan.

There may be situations where having more than one RRSP account makes sense. If an investor wants to have the flexibility to withdraw funds from an RRSP before retirement if necessary, a second plan would offer the choice of taking the money from the one which would be taxed at the lower rate.

Contributing to a spousal RRSP can be an effective way to split retirement income and pay less in taxes. To find out whether this is makes good financial sense for your personal situation, consult a financial advisor.

Seventy-one and Earning an Income? – You May Still be Able to Make an RRSP Contribution

Written on February 15, 2012 at 9:41 am, by admin

If this is the year you turn 71, you may be fully into the swing of things as a retired person, or maybe you’re just “somewhat” into the swing of retirement as you have decided to continue working (perhaps on a part-time basis). You enjoy your work and the extra cash flow is nice. However, your financial advisor has let you know that since you are 71 it’s time to make some choices about your RRSP (Registered Retirement Savings Plan). You can either withdraw the full amount as cash and incur a potentially hefty tax burden, transfer it to an annuity or a Registered Retired Income Fund (RRIF), or do some combination of all three.

Multiple Sources of Income

You could potentially have money coming in from your government pensions, your company pension, your job, investments and from your RRSP. As a result, you may be in a higher tax bracket, resulting in your Old Age Security (OAS) payments being partially or fully clawed back. Is there anything you can do to help offset some of this tax burden? You still have earned income and want to continue to make a contribution to your RRSP….Is this still possible?

Well, if you’re turning 71 in 2012, you’ll have to the end of the year to wind up your RRSP. However, you may still be entitled to RRSP contribution room in 2013 if you have earned income in 2012. Consider making your 2013 RRSP contribution in December of this year. You will face a one percent penalty per month on the over-contributed amount that is in excess of the $2,000 allowable limit. The good news is that the overall tax savings from your RRSP deduction in 2013 should be greater than the small penalty you will have to pay.

Contribute to Your RRSP After Age 71

Dianne, a family therapist, continued to work into her 71st year and in doing so, was able to qualify to make an RRSP contribution of $20,000 for the following year. However, Dianne is supposed to wind down her RRSP by the end of her 71st year. What should she do?

Well, Dianne could make the $20,000 contribution to her RRSP in December of her 71st year. This would mean that Dianne would have over-contributed to her RRSP. Under the existing rules, Dianne would incur a one percent per month penalty on any over-contribution above the $2,000 allowable amount. So Dianne’s over-contribution of $18,000 ($20,000-$2,000) would be subject to a one percent penalty for the month of December, or $180.00. In January 2013, the penalty would drop off as Dianne would now have an allowable contribution limit of $20,000 for 2013 based upon her earned income from the prior year.

If Dianne is entitled to receive 40 percent tax rebate on her contribution, this would mean that for a penalty of $180.00, Dianne would receive an $8,000 tax refund. In this instance, paying the penalty makes sense.

Dianne might also consider contributing to a spousal RRSP if she is married to someone under the age of 72 and continues to have earned income well into her 71st year. She could also take advantage of the same over-contribution strategy in December of her spouse’s 71st year.

If you are entering into your 71st year and have earned income which qualifies you for the RRSP contribution deduction, consider this strategy. Talk to your financial advisor or accountant to make sure it is right for your particular situation first. Don’t forget to discuss other tax savings options with your financial professional, such as splitting your qualified pension, annuity or RRIF income with your spouse, as well as the $2,000 pension income tax credit.