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TFSA: a flexible choice

The Tax-Free Savings Account (TFSA) is frequently called a Registered Retirement Savings Plan (RRSP) for everything else beyond retirement.

Unlike with an RRSP, you can access the money in your TFSA with no tax consequences for any need, and the amounts withdrawn are added back to your contribution limit amount in the following year.

Any Canadian resident who is 18 or older can contribute up to $5,500 (Contribution limit was raised from $5,000 as of Jan. 1) annually to a TFSA (B.C. residents must be 19 to open a brokerage account). But when should you consider this type of savings plan?

A TFSA may be useful if:

You are a younger investor – If you are currently in a low tax bracket and expect to be in a higher bracket in the future, contributing to a TFSA may be best for you.

RRSPs offer tax savings if your income is in a higher tax bracket when you contribute to the plan and in a lower bracket when you withdraw. By contributing to a TFSA while in a low tax bracket, your investments grow tax free. When your tax rate is higher, you can withdraw funds from your TFSA to contribute to an RRSP and reduce more of your future taxes.

Also, you are able to reclaim the amount you withdraw toward your TFSA annual contribution limit in the following year.

You are an established saver – If you have limited contribution room, or have maximized your annual RRSP contributions and are looking for ways to save more for retirement, a TFSA can help complement your retirement plan. In addition, you can give your spouse money that he or she can then use to contribute to a TFSA without affecting your TFSA contribution room or attracting income attribution.

You are transitioning to retirement – The TFSA can offer you tax-free income during retirement, which may help diversify your income stream. You can hold accounts with differing tax treatments in order to help smooth out your tax liabilities.

You are retired – Unlike with an RRSP, there is no requirement to close your TFSA at age 71. In addition, you can continue to contribute to a TFSA even though you may no longer be eligible to make RRSP contributions.

You are interested in preserving your financial legacy – The TFSA allows you to directly name a beneficiary. Upon your death, your TFSA assets can pass directly to your beneficiary tax free and also avoid probate. As always, please consult your tax advisor or estate-planning lawyer and your financial advisor.

If you’re looking for a flexible savings vehicle, take another look at the TFSA. You might like what you see.

Bruce Shepherd is a financial advisor with Edward Jones. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.

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