Timing your contributions

Contributions can be made at any time in the year. To maximize the value of earning tax-free income, however, it’s best to make your contributions early in the year.

You can make lump sum contributions or set up a pre-authorized contribution (PAC) arrangement. With a PAC, you make regular contributions to your account, for example, on every pay day. It’s a disciplined approach to saving, with an opportunity to take advantage of market variability, commonly referred to as “dollar cost averaging.”

Timing your withdrawals

Ideally, you only make withdrawals when necessary. If you need to make a withdrawal, the good news is that you get the contribution room back in the following year. As such, the best time to make a withdrawal is towards the end of the year. This is because you only have to wait until January 1 of the following year to get the contribution room back.

The amount withdrawn in a year doesn’t reduce the total amount of contributions you have made in the year. So, if you wish to contribute after a withdrawal, you can do so only if you have available contribution room.

Another thing to keep in mind is that you may be limited in the amount you can withdraw, because of the type of investments held in your TFSA. 

Gifting to family

As the account owner, you are the only person that can contribute to your TFSA. However, contributions don’t have to come from income that you have earned or even from your own funds.

If you’re married or in a common-law relationship or have adult children with TFSA contribution room, you can gift them money, which they can contribute to their own TFSA.

There are two main benefits to this gifting strategy:

1. The growth or income earned within their TFSA will not be attributed back to you; and
2. The gift can reduce the overall tax that you may otherwise have had to pay if that money were invested in a non-registered investment account. Therefore, you and your spouse/common law partner could benefit overall from a tax perspective, as could your adult children.

TFSA or Registered Retirement Savings Plan (RRSP) – which is better for you?

There are a few things to think about when deciding which account to contribute to:

1. Income level – when your income is low, a TFSA may be a better savings vehicle. You can save your RRSP room earned in those years for when your income is higher and you will see more income tax savings from the contributions.
2. Savings goal – what is your time horizon? A TFSA is well suited for short-, mid- and long-term goals. Tax won’t affect you when you withdraw money. An RRSP is focused on saving for retirement, so it has a long-term focus. Withdrawals are included in income and your RRSP contribution room isn’t reinstated.  

Naming beneficiaries or successor owners

You can decide how your TFSA will be passed on to others on your death. There may be options available to you:

1. Name beneficiaries - on your death, the value of your account can be received by your beneficiaries tax-free. Any increase in the account value after death is taxable to the beneficiary though. If they have contribution room, they can contribute the funds to their own TFSA.
2. Name a successor holder – depending on the province or jurisdiction where you reside, you may be able to designate your spouse or common-law partner as a successor owner of your TFSA. In the event of your death, your TFSA will be transferred to them, and it will retain its tax-free status.

TFSAs are a powerful tool to help you save. By using the strategies above, they can be even more powerful. Speak to advisor about your TFSA account.

Information contained in this article is provided for information purposes only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.