It’s been a decade since the TFSA was born. It’s grown up quite a bit over that time.
By Bryan Borzykowski for MoneySense.ca
It was hard to know it at the time, but February 26, 2008 has become one of the most significant dates in Canadian investing history. That afternoon, Jim Flaherty, then Minister of Finance, unveiled the Conservative party’s budget and, for the first time, mentioned the Tax-Free Savings Account. On January 2, 2009, the first TFSA was opened and $5,000—the maximum contribution limit that year—was deposited by some savvy investor.
When Flaherty introduced the TFSA, he listed a variety of ways someone might use the account. An RRSP, he said, was meant for retirement savings. A TFSA, where after-tax dollars can grow tax-free, was “for everything else in your life,” like buying a first car, saving for a first home and setting aside money for a “special project” or a personal indulgence. With contribution room only increasing by $5,000 per year for the first few years, using it to save for something made a lot of sense.
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One of the most common investment questions Canadians ask themselves today is, “Which is better, TFSA or RRSP”?
Here’s the good news – it doesn’t have to be an either or choice. Why not do both? Below are the features of both plans to help you understand the differences.
Tax Free Savings Account (TFSA)
- Any Canadian resident age 18 or over may open a TFSA. Contribution is not based on earned income. There is no maximum age for contribution.
- For 2018, the maximum contribution remains at $5,500. For 2019, that increases to $6,000.
- There is carry forward room for each year in which the maximum contribution was not made. For those who have not yet contributed to a TFSA, the cumulative total contribution room for 2018 is $57,500. It will increase in 2019 to $63,500. Read more
New Rules governing the Canada Pension Plan took full effect in 2016. Under these rules, the earliest you can take your CPP Pension is age 60, the latest is 70. The standard question regarding CPP remains the same – should I take it early or wait?
If you take it at the earliest age possible, age 60, your CPP income will be reduced by 0.6% each month you receive your benefit prior to age 65. In other words, electing to take your CPP at age 60 will provide an income of 36% less than if you waited until age 65.
CPP benefits may also be delayed until age 70 so delaying your CPP benefits after age 65 will result in an increased income of 0.7% for each month of deferral. As a result, at age 70, the retiree would have additional monthly income of 42% over that what he or she would have had at 65 and approximately 120% more than taking the benefit at age 60. The question now becomes, “how long do you think you will live?” Read more
There are a number of obstacles that could potentially de-rail a comfortable retirement. These include marriage breakdown, a stock market crash, and being sued. Another huge obstacle would be the diagnosis of a life threatening critical illness affecting you or your spouse. While it might be difficult to insulate yourself against some of the threats to retirement security, Critical Illness insurance goes a long way to mitigate the financial disaster that could result from a change in health as we approach retirement.
Considering that the wealth of many Canadians is comprised of the equity in their homes and the balance of their retirement plans, having to access funds to combat a dreaded illness could put their retirement objectives in jeopardy. Imagine that you are just a few years into or approaching retirement and you or your spouse suffers a stroke. The prognosis is for a long recovery and the cost associated with recovery and care is projected to be substantial. Statistics show that 62,000 Canadians suffer a stroke each year* with over 80% surviving* many of whom would require ongoing care. Since 80% of all strokes happen to Canadians over 60 those unlucky enough could definitely see their retirement funding jeopardized. Read more