Tax Free Savings Accounts, TFSA (not TSFA), are still a relatively new product. Many people are choosing to focus on their RRSP’s when it comes to long term retirement planning.
There are three essential factors that I believe to be important when considering to use a TFSA.
- Your current debt
- Your available RRSP contribution room
- Expected income in retirement
Taking into account these, let’s discuss three scenarios.
If your expected income in retirement is high where you may be faced with an Old Age Security clawback then you may want to consider utilizing a TFSA as the withdrawals in retirement will not increase your taxable income. Check with a tax professional to see how this relates to your individual situation.
If you do not have any RRSP contribution room available and you want to shelter the investment gains from taxes then a TFSA may be a great option.
Having said that, if you have debt then you should consider utilizing a Home Equity Line of Credit, HELOC.
If you use a HELOC like a chequing account, there are a number of lenders who specialize in this type of product, then you can utilize the daily interest calculation rather than paying it down slower and having your savings separate.
The advantage to a Home Equity Line of Credit is that it is readvancable. Meaning that as you pay off the line of credit you can re-utilize the credit when you need it.
If the savings was your emergency fund then you can consilidate it with your line of credit and still have it available.
The advantage is that it lowers your daily interest costs and can pay down your debt faster while still leaving funds available in case of emergency.
I have developed a model that analysis whether it is an advantage and at what level of debt a home equity line of credit should be to make this economically advantageous. Contact me for details for a free consultation.
Lastly, if you have stock that is in a non-registered account and you will be holding it for the long term and you would like to use that stock to make RRSP contributions then a TFSA would be a perfect way to shelter any gains until you make the RRSP contribution.
The TFSA would act like a holding account until you got more room to contribute to your RRSP again. At that stage you could do an in-kind contribution.
I hope this highlights some of the considerations when using a Tax Free Savings Account, TFSA, and feel free to ask us if you have any questions.
For a full explanation check out the video.
Until next time,
Trevor Dale, CFA
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