When the Tax-Free Savings Account (TFSA) was announced in Budget 2008, the Government called it “an RRSP for everything else in your life”. While the TFSA provides tax sheltering just like a RRSP or a RESP, the flexibility it offers will justify the hype surrounding it and allow us to use it more widely than its registered brethren:
Emergency funds: Since emergency funds are typically kept in savings accounts, they attract tax at the marginal rate on interest payments, guaranteeing a loss in purchasing power over time. The flexibility of the TFSA – no tax on withdrawals and the contribution room for the next year bumped up by the withdrawal amount – make it a perfect candidate for stashing emergency savings.
Saving for a home: The Home Buyers’ Plan (HBP) allows first-time buyers to withdraw up to $20,000 ($40,000 for a couple) from their RRSP but first-time buyers wanting to save even more or buyers trading up to another home should save in a taxable account with all its attendant disadvantages. The TFSA could be an ideal place for such savings and unlike a HBP, there is no repayment schedule to worry about.
Other short-term savings: As the TFSA is very flexible, it can used for all kinds of savings such as a new car, a boat, a dream vacation or that around-the-world-trip that you’ve always been dreaming about. Admittedly, the $5,000 contribution room in the first year wouldn’t go very far but the TFSA can add up to some serious chunk of cash in a few short years.
Saving for your child’s education: The RESP is still the best place to save for a child’s education because any contribution attracts the Canada Education Savings Grants (CESG) resulting in an immediate boost of at least 20%. With the introduction of the TFSA, it is best to contribute enough to the RESP to get the maximum allowed CESG of $7,200 per child (for a total RESP contribution of $36,000) and save more inside a TFSA.
Retirement savings: Since withdrawals from a TFSA do not affect income-tested benefits such as OAS or GIS, the TFSA is likely to supplant RRSPs entirely for lower income Canadians. RRSPs are likely to remain the preferred vehicle for retirement savings for Canadians in the higher income brackets. But for those who max out their RRSPs every year, the introduction of the TFSA is equivalent to adding $8,300 to the RRSP contribution room.
Initially, we plan to keep our emergency savings inside a TFSA but in subsequent years we will be contributing securities currently held in taxable accounts in-kind to a TFSA. What do you plan to do with your TFSA account?