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7 simple rules to get the most from your TFSA

Follow a few simple rules and your TFSA savings will add up.

By Gordon Pape


So you still don’t fully understand Tax-Free Savings Accounts even though they’re been around for five years?

You’re not alone. Since TFSAs were launched in 2009, I’ve received hundreds of emails and letters from people who are confused about the intricacies of these investment plans. Some are included in the new edition of my book Tax-Free Savings Accounts: How TFSAs Can Make You Rich, which has just been published by Penguin Canada.

At first glance, TFSAs seem deceptively simple. You put some money into an account, hopefully make a profit, and eventually withdraw it all tax-free. But, as they say, the devil is in the details. That’s why tens of thousands of people have been advised by the Canada Revenue Agency that they inadvertently over-contributed to their plans — they just didn’t understand the rules.

To help you get the maximum benefit from your account and avoid running afoul of the CRA, I’ve put together a list of TFSA dos and don’ts based on my book. Here they are.

Don’t get stuck in the wrong plan . There are several different types of TFSAs. If you walk into a bank or credit union and ask to open an account, they will probably put you into a savings plan or one based on guaranteed investment certificates. With interest rates so low, your return from these will be negligible. If all you want is to set up an emergency fund, that’s fine. But if you are looking to maximize tax-free profits, you’ll want a plan that allows you to invest in mutual funds (available at most financial institutions) or the stock market (you’ll have to go to a broker).

One reason so many people ran into trouble with the CRA was that they opened the wrong type of plan for their goals. When they figured it out, they withdrew the money and moved it to a more appropriate account, not realizing that in doing so they were over-contributing. The result: penalty interest. So get it right the first time.

Do think through the TFSA/RRSP conundrum . This is the start of RRSP season. Since most people only have a limited amount to invest, deciding between a TFSA and an RRSP can be difficult. The RRSP has the advantage of immediate tax deductibility but you’ll be dinged in later years when you make a withdrawal. There’s no tax break for a TFSA but when it comes time to take some money out of the plan it’s all yours to keep.

There is no simple answer to this one but as a general rule if you expect your tax rate to be lower after you retire, the RRSP is the best choice. The TFSA is preferable for those who expect their income will be higher. Ironically, it’s also a much better choice for low-income people who expect to rely on the Guaranteed Income Supplement when they retire, as withdrawals are not counted as income, as withdrawals from an RRSP are.

Don’t use TFSAs for education savings . Generally, a registered education savings plan (RESP) is the best choice for putting money aside for a child’s or grandchild’s post-secondary education. The reason is the Canada Education Savings Grant, a federal government payment which is worth up to $500 a year to a maximum of $7,200 per child.

Do have a succession plan . No one wants to think about death when they’re opening a TFSA but you need to. In all provinces except Quebec, investors with a spouse or partner are allowed to designate a “successor holder.” If anything happens, that person automatically takes over the account — it does not have to go through the estate process.

To be clear, a successor holder can only be the spouse or common-law partner of the person who owns the TFSA. Anyone else named to inherit the plan’s assets, such as a child or sibling, is a beneficiary. You’ll be asked to complete the appropriate forms when you open the account.

Don’t open a lot of plans . Technically, there is no limit to the number of TFSAs you can own. But there is no advantage to multiple plans — you don’t get any more contribution room and it will be more difficult to keep track of your investments.

Do help your spouse/partner open a plan . Normally, you can’t give money to a spouse/partner to invest because of the CRA’s income attribution rules. TFSAs are an exception, however. If your loved one does not have any money to invest, you can provide it with no penalty. This effectively means that the contribution limit for a couple is doubled.

Note that there are no spousal TFSAs. Each person owns the plan in their own right.

Don’t over-contribute . The individual limit for 2013 is $5,500 plus any carry-forward room from previous years and any amounts withdrawn in the past that have not been replaced. To find out your personal limit, check your account at the CRA website.


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