How TFSAs in Canada Can Be a Good Option for Retirees

An older couple sitting with a person taking their information on a clipboard

For many Canadians, putting money into a tax-free savings account (TFSA) is a no-brainer. Your money grows completely tax-free and you can withdraw it at any time, with no penalties.

However, many people aren’t aware of some of the TFSA rules. We often hear people ask, “How much can you contribute to a TFSA, what is my TFSA limit and what is TFSA eligibility?” This article will answer all of those questions and look at ways that a TFSA can benefit retirees.

What is a TFSA?

It might be more accurate to call the TFSA a tax-free investment account, because you can hold a wide variety of investments within it. Canadian residents aged 18+ can open a TFSA and save up to the maximum allowable amount every year.

One of several TFSA benefits for retirees is that, unlike with RRSPs, you don’t have to have earned income to contribute. You can also give money to your spouse to contribute to their TFSA without affecting your own TFSA contributions.

While contributions are not tax-deductible, a major TFSA benefit is that you won’t be taxed when you make a withdrawal and your investments will grow tax-free.

How does a TFSA work?

One of the key TFSA benefits is that your savings grow much faster because you don’t pay tax on the interest. Also, your TFSA has no impact on your tax return if your investments receive dividend payments, so it can be a good option for retirees looking to boost their retirement income.

Flexibility is another TFSA benefit. You can withdraw any amount of money, at any time, with no penalties or financial repercussions.

If you are not financially prepared for retirement, you may not be able to enjoy these years to the fullest. If you think you may not have sufficient savings then don’t worry, there are ways you can prepare for your retirement without the burden of any monthly mortgage payments.

How much can I put in my TFSA?

TFSA contribution rules limit how much you can invest annually. The maximum TFSA contribution room by year has changed since it was launched in 2009, when the maximum contribution was $5,000.

The maximum amount has since risen to $6,000 for 2020. You can carry forward unused amounts or withdrawals to the next year, so calculating the exact amount you’re allowed to save can be complicated.

So, what is my TFSA limit?

Knowing how your TFSA contribution limit works is essential. It depends on previous contributions, any amounts you have withdrawn and how long you’ve lived in Canada since 2009 while aged 18-plus.

If you have never contributed to a TFSA and were over 18 in 2009, in 2020 your TFSA contribution limit would be calculated as follows:

Your TFSA contribution limit for 2020:$6,000

Plus unused TFSA contribution room from previous years: $63,500
Total contribution limit for 2020: $69,500

There are several ways of finding out your exact maximum TFSA contribution: ask your accountant, sign into My Account on the CRA website, or phone the Tax Information Phone Service by calling 1-800-267-6999.

Worried about how you can financially support your retirement? Find out how your home equity can help prepare for your retirement!

What happens if I go over my maximum TFSA contribution?

How does a TFSA work if you pay too much into it? You will have to pay tax equal to 1% of the highest excess amount for each month that it remains in your account. So be careful not to overcontribute.

If you go over your maximum TFSA contribution limit deliberately, you will have to pay 100% tax on any gains or income you make on the excess amount.

Key TFSA benefits

  • TFSA rules state that withdrawals or income from TFSA investments have no impact on any government benefits, such as Guaranteed Income Supplement (GIS) or Old Age Security (OAS)
  • TFSAs provide additional tax-free investment growth for those people who have maxed out their RRSP contributions
  • Unlike with RRSPs, you can withdraw as much as you like before you retire, with no penalties
  • You can hold a wide range of investments within TFSAs, such as stocks, mutual funds and ETFs
  • You can give your spouse money to put in their own TFSA without it affecting your contributions
  • You don’t have to withdraw money from it after you reach 71, unlike RRSPs/RRIFs, so it allows retirees to keep more control over their money

Downsides of TFSAs

  • Contributions are not tax-deductible, so you don’t get the immediate tax break you would with RRSP contributions
  • Depending on your earnings, the contribution limit is potentially considerably less than with an RRSP – only $6,000 compared to a current maximum of $27,230 for RRSPs
  • You can’t claim a capital loss if your investments lose money within a TFSA
  • Dividend income from investments in a foreign country could be subject to foreign withholding tax

What are TFSA rules regarding investments?

Much like RRSPs, you can hold a wide variety of investments in TFSAs, as well as cash. However, you need to be sure that everything you have in your TFSA is a qualified investment. These include:

  • Stocks listed on a designated stock exchange
  • Government (municipal, provincial and federal) or corporate bonds
  • REITs (real estate investment trusts)
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Guaranteed Income Certificates (GICs)

You can take out a self-directed TFSA, where you get to choose the financial products held within it. This option gives you the most flexibility when building your TFSA portfolio.

Be sure to avoid non-qualified investments, which include stocks not on a designated exchange, de-listed foreign companies and shares in a company of which you own 10% or more. This can be a very complex area and it pays to talk to your financial advisor before investing. Any gains or income made from non-qualified investments will be taxed at 100%.

What happens to a TFSA on death?

Another TFSA benefit is that if you designate a successor holder, (your spouse or common law partner), they take over the TFSA after you die, with no impact on their own TFSA contributions.

If you name a designated beneficiary, such as your children or a registered charity, they will have until the end of the year following your death to transfer those TFSA amounts into their own TFSA, without affecting their contribution room.

If you don’t designate a successor holder or beneficiary, the TFSA on death is no longer considered tax-free and your beneficiary will have to pay tax on any earnings made after your death.

How a reverse mortgage can help you contribute to a TFSA

A reverse mortgage is a great way to cash in some of the equity in your home, without having to pay any regular mortgage payments. You only have to pay what you owe when you leave or sell your home. Our customers use the money from their reverse mortgage to:

  • Pay off debts
  • Boost retirement income
  • Make renovations
  • Pay for medical care and expenses
  • Make investments to take advantage of TFSA benefits

If you would like to find out more about how a reverse mortgage might help with your finances and investments, contact a HomeEquity Bank specialist at 1-866-522-2447 or your financial planner today.

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