ACCOUNT ABILITY
Making the most of your tax-free savings account means knowing what it can and can’t do.
When Jim Flaherty launched the Tax Free Savings Account in the 2008 budget he called it the most important personal finance vehicle since the RRSP. Tuesday it may get even better, if the broadly leaked hints ahead of the federal budget mean a doubling of the annual limit to $11,000.
Even if it doesn’t happen, the TFSA is now a big piece of our overall savings strategy. Canadians have nearly 11 million accounts with investments worth $118 billion inside, according to the Canada Revenue Agency. So if you haven’t got one, now may be the time to get going.
Here are answers to frequently asked questions about TFSAs: 1. Can I open one for my kids? No. The kids must be 18 to open the account, but you can give them the money to put in. 2. Can I have a joint account with my spouse? Also, no. The account must be in one person’s name so the CRA can keep an eye on contributions. 3. What’s the average contribution? It was $4,000 a year in 2014, according to research for Bank of Montreal by Pollara Strategic In- sights. The total holding per account was $17,490 at the same time. 4. Who uses TFSAs most? Those 75 and over have the most accounts, followed by those between 55-to-59, according to the CRA. 5. What’s the limit? It is $5,500 for 2015, but that could rise to $11,000 if the Conservatives fulfil their promise. This year’s cumulative contribution room is $36,500. 6. How often does the limit rise? Increases are linked to inflation and rise in $500 increments, whenever inflation erodes the value by $250. For example, at a 2 per cent rate of inflation, $5,500 is worth $110 less at the end of the year. After three years this would trigger an increase. The last increase was in 2013. 7. What about unused room? Like an RRSP, what you don’t use now adds up and can be used later. According to the CRA, 88 per cent of available TFSA room is unused. 8. What can you put inside a TFSA? Cash. GICs, mutual funds, ETFs. You can also transfer shares or mutual finds from another account, which is called a contribution in kind.
For example, if you own 100 shares of a company worth $10 each, you can transfer the shares worth $1,000, into your TFSA without selling them. The value of the shares is set on the day of the transfer. 9. How are TFSAs different from RRSPs? You make TFSA contributions with money on which you’ve already paid tax. What’s inside grows tax-free. RRSP contributions give you a tax break when you put the money in, but you pay the tax when you take the money out in retirement. 10. Are contributions tax deductible? No. Nor can you deduct interest on money borrowed to make a contribution. 11. Who’s eligible? Residents of Canada over the age of 18. Unlike RRSPs which must be turned into Registered Retirement Income Funds (RRIFs) in the year you turn 71, TFSAs are forever. 12. How many accounts can I have? As many as you like, but do you really need more than one? The CRA says 7.8 million Canadians have one account, 1.4 million have two. There are 730 people who have 10 or more accounts. 13. Can I leave my TFSA to my spouse: TFSA assets can generally be transferred to a spouse or children upon death tax-free. One spouse must name the other as the TFSAs beneficiary, called a ‘successor holder.’
Talk to your adviser or broker about how to do it. 14. What happens when I take money out? The full amount can be put back, though not until the next calendar year. Suppose you put $10,000 in your TFSA, but the investments have grown to $30,000. If you take the $30,000 out today, you can put it all back on Jan. 1, 2016, plus the limit for 2016. 15. Why is there confusion about withdrawals? Using the example above, the confusion arises if you put the $30,000 back this year. It would be viewed as a $30,000 overcontribution by the CRA, assuming you have no more room in your TFSA. You would face a penalty. 16. How do the penalties work? The CRA charges 1 per cent per month on excess contributions.
Suppose you put in $500 too much on Jan. 1 and don’t realize it until June 30.
On June 30 you take out the $500. The penalty would be $30 ($5 per month x 6 months.) 17. Does a TFSA affect other government programs? No. Neither income earned within a TFSA, nor withdrawals affect such things as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit. 18. I’m getting divorced. When there is a breakdown in a marriage or common-law partnership, an amount can be transferred from one individual’s TFSA to the other’s without affecting either individual’s contribution room. The transfer must be made directly between the TFSAs. 19. Who keeps track of things? The CRA based on information provided by financial institutions who record your contributions and withdrawals. 20. Where can I find out more? Go to the CRA website or Google ‘TFSA rules.’ Star contributor Gordon Pape has written a comprehensive book called Tax-Free Savings Accounts: How TFSAs can make you rich. It’s the definitive how-to manual. More columns by Adam Mayers Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca .