Every Canadian should have a tax-free savings account to take advantage of its various benefits, recommends Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
Golombek provided an overview of relevant tax and estate issues for advisors, including the use of the TFSA, at the Canadian Institute of Financial Planners’ annual national conference in Halifax on Wednesday. He said the new account offers a variety of opportunities for different types of clients.
For younger adults, the account is especially advantageous. Golombek said it makes more sense for individuals early in their careers to open a TFSA rather than an RRSP if they are making less than $40,000 a year.
“If they’re only in the 20% tax bracket now, and the 40% bracket later on, then, mathematically, they’d be better off with the TFSA,” Golombek said.
Once they enter a higher tax bracket, they could withdraw the entire amount accumulated in the TFSA and roll it into an RRSP for a hefty tax deduction, he said.
Another TFSA strategy involves education planning. Individuals saving for education should make contributions to the registered education savings plan in order to maximize the available Canada Education Savings Grants, Golombek said. But for contributions above $2,500, he recommends the TFSA as the most flexible savings vehicle.
The TFSA could also be used for income-splitting strategies, Golombek said, by transferring a $5,000 gift from one spouse to another in a TFSA each year, which offers an exception from attribution rules.
Estate planning offers another opportunity to use the TFSA, as the entire invested amount is tax-free upon death. In addition, if left to a spouse or partner, there is a tax-free rollover.
Additionally, individuals are now able to name beneficiaries for their accounts, to avoid probate tax, in some provinces, Golombek noted.
Lastly, Golombek said the TFSA could play an effective role as a “rainy day” emergency fund.
“Where else can you protect very short-term money and shelter interest income?” he asked, noting that it’s highly liquid nature, and the ability to recontribute starting the following year “makes it a great source of emergency funds.”
CIBC’s Golombek: Top five TFSA opportunities
Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, describes five ways that your clients can take advantage of Tax Free Savings Accounts. He spoke at the CIFPs in Halifax on June 10. Click here to watch.