The Tax Free Savings Account (TFSA) is one of the few gifts Canadians have received from their government that provides a lasting positive sentiment.
Everyone should maximize their annual contribution to their TFSA account before depositing any funds in their RRSP.
When you are young, the marginal tax rates that are deferred in making RRSP contributions do not offset the tax-free savings on TFSA account accumulations.
Secondly, funds can be withdrawn from your TFSA account on a tax-free basis at any time. Withdrawal from an RRSP is taxable at your marginal tax rate in the year of withdrawal.
Amounts withdrawn from a TFSA account can be re-deposited in the following year or carried forward whereas withdrawals from RRSP accounts cannot be re-deposited in the future.
This makes the TFSA the best store of value, which can be used for emergency expenditures or large capital requirements such as a deposit on a new home.
A 30-year old individual who deposits $5,500 per year in his TFSA account will accumulate over $500,000 in the account by the age of 65. This means the individual can withdraw over $40,000 per year for the next 20 years tax-free and still have some funds left in the account. This provides a very nice supplement to other sources of retirement funds.
I’ve recommended to a number of young couples to use their TFSA account to accumulate funds under a Guaranteed Withdrawal Plan issued by life insurance companies. This provides a minimum return per year and a defined benefit in retirement years, all tax-free.
The TFSA is the gift that keeps giving.