Middle class loses more than it gains in TFSA rollback
Setting the contribution limit back to $5,500 per year to fund tax cuts isn’t a net benefit for middle-income earners
Friday’s throne speech didn’t mention tax-free savings accounts (TFSAs), but federal Finance Minister Bill Morneau didn’t leave us in suspense for long.
On Monday afternoon, as part of measures to help pay for a middle-class tax cut, Morneau — cheerfully and in a brisk boardroom manner — said the $10,000 annual limit introduced by Conservative finance minister Joe Oliver is gone.
The good news is that the $10,000 amount stands for this year and goes into your lifetime total. But as of Jan. 1, it’s back to the future for this popular savings vehicle, dubbed the Totally Fantastic Savings Account by Wealthy Barber David Chilton. It reverts to $5,500 a year.
The Liberals argued during the election that the higher limit only benefits the rich, but I doubt the rich care one way or another about TFSAs. When you have millions to save, the $41,000 in room we all have after seven years isn’t meaningful. The rich have plenty of other ways to take care of themselves.
“It comes down to how you define ‘wealthy’ — which nobody does when making such statements,” says Dan Hallett, a financial planner and vice-president of Oakville’s HighView Financial Group.
“And that’s a critical point. Certainly, those who maximize the TFSA contribution limits are more affluent than those that don’t — on average. But that doesn’t mean a higher limit only benefits the wealthy.”
For middle-income Canadians, older Canadians heading into retirement and those already there, the higher limit — and any portion of it they could use — would have been helpful. Savings rates are at record lows, so encouragement to save would seem to be a good thing.
Morneau says the promised middleclass tax cut will average $330 a year for single earners and $540 per couple. He has to pay for that, and imposing a higher tax on those making over $200,000 won’t do the job alone. Rolling back the TFSA is a way to narrow the gap.
Here, the new government is out of touch with the people who elected it. An Angus Reid poll in the middle of the election campaign found that 67 per cent of Canadians opposed rolling back the TFSA limit. By party, NDP supporters liked the increase more than Liberals — 63 per cent versus 62 per cent — with Conservative supporters highest at 78 per cent.
A study by the Canadian Association for Retired People (CARP) this spring found the same thing. Two-thirds of CARP members supported the extra saving room.
The TFSA has been of particular benefit to older Canadians. It has only been around for six years and so is a new way to shelter a little more money in retirement. Those 55 and older hold almost half of all TFSA accounts, according to the CRA.
Strict rules force you to convert your RRSP into a Registered Retirement Income Fund when you turn 71. That’s because the government wants the taxes that were foregone when you put the money into your RRSP and got a refund.
But some older Canadians don’t need all that money to live on, so they use a TFSA to let it grow tax-free. So here’s where we are: The $10,000 TFSA limit introduced this spring stands for the year. If you don’t contribute the full amount, it becomes part of your lifetime limit.
As of Jan. 1, the limit reverts to $5,500 per year, which will be indexed, which the $10,000 wasn’t.
Morneau said indexing will allow the TFSA to retain its real value. It is set to rise in $500 increments whenever inflation erodes the value by $250.
At a 2-per-cent rate of inflation, that bump should come every three years or so, since the $5,500 is worth $110 less each year. The only increase so far was in 2013. It’s unclear when the next one will be.
In the end, the new government had to make choices about how to fund its ambitious agenda. A higher TFSA, cast as a perk for the rich, was an easy choice. But what the middle class is getting in a tax cut isn’t as large as what it’s losing in a higher TFSA limit. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Have a question? Reach him at amayers@thestar.ca.