Whatever the reason, many savers feel very uncomfortable with the payment of RRSP exit taxes. Thus, they neglect to contribute or let their savings sleep in a common bank account. The TFSA (Tax-Free Savings Account) changes the game.
Since the TFSA contribution limit is much lower than that of RRSPs ($ 5500 per person per year vs. 18% of earned income), accumulated capital is significantly lower than in RRSPs. Still, as the amounts are NET and will never affect the taxation of your other income and annuities, the TFSA for retirement is a nice option. You can very well supplement your income from the QPP and old age security with this plan.
Choosing the right investments
An effective and efficient TFSA is a carefully chosen TFSA. ALL eligible RRSP investments are also eligible for the TFSA, so there is no choice. When you choose to maximize your TFSA and use it other than as an emergency fund, the results are striking. “Income distribution mutual funds” have the advantage of being relatively exposed to the stock market and, therefore, not very volatile. The risks of decline following a crash or a stock market correction are contained. With this type of investment, we can expect an average return of 5% annually.
Let’s look at the case of Juan and Rose. Juan is 46 years old, he is an advertising photographer on his own. Rose is 47 years old and is an artist agent. Our two self-employed people have little affinity with the RRSP principle. In 2009, they chose to maximize their TFSA. They accumulated $ 38,500 each (deposit of $ 36,500 + accumulated earnings of $ 2,000). Let’s see, what they could get as retirement funds if they continue to optimize their tax-free savings accounts.
Considering their combined investment of $ 77,000, annual total contributions of $ 11,000 and annualized growth of 5% …
They could count at 66 and 67 years old on a non-taxable nest egg of $ 568,000. Not bad, is it? This capital could then be able to pay them $ 38,000 tax-free every year for 25 years. If we add for each government rents, our couple could well afford a comfortable retirement exceeding $ 5600 net per month. Yes it’s true, it’s with money that you make money. And without tax, it goes faster.