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2020 begins tomorrow, so lets get into it with some good news. The TFSA (Tax Free Saving Account) has increased the amount of contribution room available as of Jan. 1, 2020. The contribution room has been extended to $6,000 dollars. So, what does that mean and what is a TFSA?
The TFSA is frankly, from my own perspective one of the sweetest available tax havens in Canada, provided it is utilized properly. Contributions made can grow within the TFSA and are never taxed. So, all income, capital gains and dividends made are tax free. It should be noted that Non-Canadian Dividends are subject to withholding tax to the IRS. TFSA room can be shared by spouses. So, money from a joint account can go into either spouse’s TFSA to the maximum allowable contribution limit for each individual over the age of 18. The TFSA came into play to spur on the financial markets after the turmoil and meltdown of 2008. Since then, the TFSA has had steady increases of contribution room and individuals that have missed out can have an accumulation of unused room available to them.
An example would be if you were 18 in 2008, had zero contributions to the TFSA, there would be a whopping $69,500 dollars of available contribution room to the TFSA. I utilize the account as a long-term savings account and prefer to hold stocks, and have the dividends reinvest on a DRIP (Dividend Re-Investment Plan). DRIP’s are a great way to have the stock re-invest into itself. The dividend paid out by the stock buys you more stock. It’s a win, win. One would have to enquire for each stock held, what the dividend would be and then the price point for which the dividend would cover the cost of the stock re-investment. (Note: not all stocks pay dividends, not all stocks have DRIPS available, most stocks that do, require a set amount of purchase of the stock to have a DRIP setup. Also, note your own risk level and do your own due-diligence prior to purchasing or making any form of investment.) I have a self administered account, so the trade “fee” to purchase the stocks is low. One strategy for making contributions to a TFSA is after you have done your RRSP contribution and you receive a tax refund, deposit it directly into the TFSA. Or you can start a pre-authorized deposit on your pay day. An added benefit for Estate planning is the TFSA account allows beneficiaries to be added to the account. There are no restriction for withdrawal as to use of the money and at what stage of life.
Example: to supplement income later in life, buy a car, pay for education, use for a deposit on a home or income property. The tax free savings account is the next best thing from a tax perspective to paying zero capital gains on the sale of a personal residency of your home. Your contribution allowable amount is listed on your tax “Notice of Assessment”. You should also note that over contributions are subject to penalty by Canada Revenue Agency (CRA). For the “savers” out there, make those contributions for the future so you can make the most of your money and enjoy tax free source of retirement income in the future!
All the best from my family to yours for a healthy and prosperous 2020!
Please feel free to contact me for your Mortgage and Coaching needs!
Anne Godin-Kewell, Mortgage Specialist & Certified Coach Practitioner ~ Mortgage Agent Lic# M19002238
Broker Lic# 10231
Disclaimer: The articles are owned and copy-write of the above. The information is not Investment Securities Advice. As always, before implementing anything financial, do your own due diligence. Read the latest press releases and regulatory filings.