The Best Tax Free Savings Account Strategy For Post-Retirement
Many recent studies have found that Canadian citizens are not saving enough and have high debts to pay.
To control the situation and provide flexible savings options to the people the Canadian government has introduced the investment scheme called Tax Free Savings Account starting January 1 next year.
Every Canadian citizen who is 18 years of age or older is eligible to open this account, make annual contributions which are not tax deductible, and earn tax free income from investments made from the account.
To understand what is the best tax free savings account strategy for post retirement you need to know the following points.
· Why save for life after retirement? · What are the savings and investment options available? · Are these savings options mutually competitive or supplemental? The need to create a financial cushion for your retired life can hardly be emphasized.
Canadians now have more savings options viz.
Registered Retired Savings Plan (RRSP), TFSA (Tax Free Savings Account), Registered Income Fund (RIF), Locked-In Retirement Account etc.
We are assuming that people already know about RIF, RESP, GIC, and other long term investment options.
In a market with competing and equally tempting investment vehicles it is not easy to make an investment decision for post retirement savings.
Following are some helpful tips which will make your savings choice easier.
The best strategy is to have both TFSA and RRSP accounts.
There are advantages attached to both these accounts.
· Firstly income earned inside the TFSA account and withdrawals from the account will not affect eligibility for federal income-tested benefits and credits.
· Secondly the withdrawals are absolutely tax free and the balance of contribution is rolled over to the subsequent year.
· Thirdly there is no tax liability on income earned within the TFSA account.
You are free to invest the money in mutual funds, equity, and real estate.
The interest, dividend, and capital gains earned on these investments will not be taxable.
· Fourthly if a person has enough money to save he must open both the accounts.
But he must invest in a TFSA only after making the maximum contribution to the RRSP (which gives an immediate tax break because it can be deducted from income).
A TFSA along with the RRSP account can be a good option for higher income Canadians.
People in lower income brackets can choose to create only the TFSA account as there is a provision of contribution rollover unlike the RRSP.
· Fifthly if a person plans to convert his RRSP account into a RIF (Retirement Income Fund) account he can do the same conversion from a RIF to a TFSA account.
It is better to get tax free savings benefit.
This will have two advantages.
One consolidate your retirement plans into one TFSA will increase savings and income flexibility.
You will not have to maintain complex records in multiple accounts.
Two you will be able to take the advantage of contribution rollover.
In contrast to the RIF you will not have to pay any tax on withdrawals.
Consolidation is a good strategy only when you have very limited scope for savings.
· Sixthly a retiree plan must carefully analyze the advantages and disadvantages of all the retirement options.
For example it is a good idea to get the $5000 shelter in a TFSA account and then if there is any spare income you can consider putting it into a RIF/RRSP account.
Another important point to be considered is that it would make sense to convert part of your RRSP to a RRIF account since RRIF income (but not RRSP income) will be eligible for the pension credit.
In such a case diversification rather than consolidation is the right strategy.
· The important issues to be addressed when planning for your retirement are:
To control the situation and provide flexible savings options to the people the Canadian government has introduced the investment scheme called Tax Free Savings Account starting January 1 next year.
Every Canadian citizen who is 18 years of age or older is eligible to open this account, make annual contributions which are not tax deductible, and earn tax free income from investments made from the account.
To understand what is the best tax free savings account strategy for post retirement you need to know the following points.
· Why save for life after retirement? · What are the savings and investment options available? · Are these savings options mutually competitive or supplemental? The need to create a financial cushion for your retired life can hardly be emphasized.
Canadians now have more savings options viz.
Registered Retired Savings Plan (RRSP), TFSA (Tax Free Savings Account), Registered Income Fund (RIF), Locked-In Retirement Account etc.
We are assuming that people already know about RIF, RESP, GIC, and other long term investment options.
In a market with competing and equally tempting investment vehicles it is not easy to make an investment decision for post retirement savings.
Following are some helpful tips which will make your savings choice easier.
The best strategy is to have both TFSA and RRSP accounts.
There are advantages attached to both these accounts.
· Firstly income earned inside the TFSA account and withdrawals from the account will not affect eligibility for federal income-tested benefits and credits.
· Secondly the withdrawals are absolutely tax free and the balance of contribution is rolled over to the subsequent year.
· Thirdly there is no tax liability on income earned within the TFSA account.
You are free to invest the money in mutual funds, equity, and real estate.
The interest, dividend, and capital gains earned on these investments will not be taxable.
· Fourthly if a person has enough money to save he must open both the accounts.
But he must invest in a TFSA only after making the maximum contribution to the RRSP (which gives an immediate tax break because it can be deducted from income).
A TFSA along with the RRSP account can be a good option for higher income Canadians.
People in lower income brackets can choose to create only the TFSA account as there is a provision of contribution rollover unlike the RRSP.
· Fifthly if a person plans to convert his RRSP account into a RIF (Retirement Income Fund) account he can do the same conversion from a RIF to a TFSA account.
It is better to get tax free savings benefit.
This will have two advantages.
One consolidate your retirement plans into one TFSA will increase savings and income flexibility.
You will not have to maintain complex records in multiple accounts.
Two you will be able to take the advantage of contribution rollover.
In contrast to the RIF you will not have to pay any tax on withdrawals.
Consolidation is a good strategy only when you have very limited scope for savings.
· Sixthly a retiree plan must carefully analyze the advantages and disadvantages of all the retirement options.
For example it is a good idea to get the $5000 shelter in a TFSA account and then if there is any spare income you can consider putting it into a RIF/RRSP account.
Another important point to be considered is that it would make sense to convert part of your RRSP to a RRIF account since RRIF income (but not RRSP income) will be eligible for the pension credit.
In such a case diversification rather than consolidation is the right strategy.
· The important issues to be addressed when planning for your retirement are:
- You have to address ageism and not ignore the fact that you have to quit working after a certain age.
- There are tools available to help you prepare for your retirement.
You must use them.
- You must plan a smooth transition to retirement and address existing needs to operate tax free savings account and retirement plans.
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