INTRODUCTION TO THE TFSA: Tax-free Savings Accounts

Tax-free Savings Accounts—How about some good news!

Greetings!

Two of the most “delicious words” in financial planning are “tax-free.” As of January 2, 2009, Canadians will have access to a TFSA [tax-free savings account]. The TFSA is the most exciting tax-saving opportunity for Canadians since the introduction of the RRSP. And, when properly used, there is simply no down-side to the TFSA.

"With its ability to immediately shelter investment-related income from taxation, the TFSA should become an indispensable wealth planning tool for all Canadian investors," says Doug Carroll, Vice President, Tax & Estate Planning at Invesco Trimark.

Allow me to cover the basic features of the TFSA below. With later newsletters, I will get into further details and planning opportunities.

Features of the TFSA—

-The account can be set up for any Canadian resident age 18 or over regardless of his or her income.
-The TFSA contribution is done with after-tax dollars [unlike an RRSP], but look—
-The investment income earned in the TFSA is tax-free and—
-Withdrawals from the TFSA are tax-free.
-You’ll be able to contribute up to $5,000 each year beginning in 2009 [the $5,000 contribution room will be indexed, or increased, each subsequent year].
-You can withdraw money at any time, tax-free, and then choose to “re-pay” your TFSA at any time in the future.*

Furthermore—the TFSA does not “replace” the RRSP or RESP, it supplements it; a spouse or parent can fund the contribution for the TFSA of a spouse or child; unused contribution room for a TFSA is carried forward to future years.

Here are just a few ways that tax-payers can make use of the TFSA—

-Save for a specific purpose like a renovation or recreation property, again with no tax on the investment income.
-Supplement retirement savings. In retirement, this will augment the tax-efficiency of producing retirement income.

See more examples at the very bottom under “Scenarios.”


In brief, what does the TFSA mean for investors? Beginning in 2009, any non-registered investments should be made in a TFSA within the limits allowed. And, once you’ve maximized your RRSP—or if you are in a low tax bracket—the TFSA becomes an efficient way to save additional monies for retirement or a child’s education without having to worry about tax on investment growth. The longer the time horizon for building up your TFSA, the more you will benefit from the tax-free compounding of investment growth. Finally, unlike an RRSP, when you withdraw monies from your TFSA there will be no tax.

I will be offering TFSA accounts in the new year that are free of administration and withdrawal fees. In the meantime, if you have any questions about TFSA accounts, see the supplementary reading provided below and then send me any unanswered questions.

Cheers!

Tom

Next newsletter: the RRSP versus the TFSA

Notes--
*For example, say you contributed to your TFSA and, after several years, it is worth $30,000. You can withdraw any or all of that money tax free and not lose the contribution room. So, if you withdrew $30,000 from your TFSA, you can put the $30,000 back at any time in the future. On top of this, you will receive your additional $5,000 [indexed] contribution room each year.
Supplementary reading—

Click on or enter the following links into the address bar of your browser—

1. Investor Q&A on the TFSA

http://www.advisormailout.com/Advisor/Home/1153/1685/images/TFSA%20Investor%20Q&A%20Final.pdf

2. Scenarios--how to take advantage of the TFSA

http://www.advisormailout.com/Advisor/Home/1153/1685/images/Scenarios.pdf

Reprint: Retirement fears ill-founded.

This article is courtesy of Advisor.ca
by Mark Noble


Almost two-thirds of Canadian pre-retirees are worried about outliving their money, but once they're well into retirement, the fear subsides, according to a new survey conducted by Russell Investments and Harris/Decima Research.

The survey of 2,200 Canadians found that only 40% of respondents felt comfortable about their financial health in the first year of retirement. In year two, the percentage of those who felt comfortable drops sharply to only 29%. However, within years three to five after retirement, optimism takes hold, with 58% of retirees feeling comfortable about their financial circumstances. And once they had passed the 10-year mark, only one in five was still worried about having enough money.

This rise in confidence could result from retirees making the best of their new situation, but Irshaad Ahmad, president and managing director of Russell Investments Canada, says the company has found that many retirees meet their retirement goals once they are actually retired and understand what they need. "Once they get through the first two years of retirement and they realize things are going to be OK, a lot of the concern starts to go away," he says. "Also, they start to realize the power of CPP and OAS and their pension income, if they have one. Once they figure out how much they actually need, they start to feel better. A lot of people don't know how much they need until they start to live it. We hear retirees saying things like, 'I don't have a mortgage anymore, my kids are all grown up, and this isn't as tough as I thought it was going to be.'"

Sending out an optimistic message about retirement would seem counter-intuitive to an asset management company that earns its returns from sales to pre-retirees. But Russell was already bucking the trend on conventional industry wisdom when the company suggested earlier this year that retirees probably don't need more than 60% of pre-retirement income for a happy retirement. Most people in the investment industry quote a figure somewhere in the vicinity of 75% as what is needed.

Ahmad believes it's important for advisors to have a retirement reality check for clients so they can work to create a realistic financial plan. "We saw the data of our survey and the remarkable difference between those who had not retired and those who had retired. Given the level of anxiety displayed by those who have not retired, it's evident there is a disconnect in information. We wanted to find a way to shine a light on that," he says. "If you actually help people and identify what the issues are and what they need to do to solve it, presumably people will remember and be grateful for that."

Russell has found a few common traits among retirees who felt comfortable about their financial health. These types of people--

--tend to have higher net worth, assets and income.

--are much more likely to have a pension and started planning for retirement at an earlier age.

--tend to be fortunate in terms of life experiences: they are less likely to be separated or divorced and more likely to have paid off their mortgages and to have received an inheritance.

Ahmad emphasizes that professional financial advice is also extremely important. "People who work with advisors have a higher level of financial health and feel better about their financial health than people who don't use an advisor, so clearly advisors are doing a good job in that regard," he says.