Tax Free Savings Account and Seniors
Tax Free Savings Accounts
Families approaching retirement and cannot afford to make the maximum contribution to both a Tax Free Savings Account and a Registered Retirement Savings Plan should consider one key advantage offered by TFSAs. Money withdrawn from an RRSP is included in income, while funds that are withdrawn from a TFSA account are not taxable. This can be very important for individuals that are retired. Consider the following:
• The Guaranteed Income Supplement is reduced when income exceeds approximately $17,500 for single people and $23,200 of combined income for married and common law couples.
• Old Age Security payments are reduced once income exceeds approximately $74,000
• The maximum claim for the age-related tax credit can be claimed when your income is less than approximately $83,400
• The maximum claim for a spousal tax credit is reduced when the spouse’s income reaches approximately $11,500.
• Although not claimed by many seniors, the Canada Child Benefit is calculated based on family income
• The GST/HST credit is reduced when income exceeds a certain threshold
Withdrawing money from a Tax Free Savings Account will not impact the calculation of income for these various benefits. However, RRSP income may result in a reduction.
TFSA Withdrawal Trap – Once an individual has made the maximum contributions to a TFSA, there is a 1% per month penalty on excess contributions. Many families are subject to these penalties since they make one of the following honest mistakes:
• They make a contribution of say $5,000 in March and withdraw the funds in May to fund a family emergency. In September, they redeposit the $5.000 into their TFSA. The government looks at deposits net of withdrawals. Therefore the government considers this to be a $4,500 overcontribution and applies the penalty tax. The family should have waited till the next calendar year to make the contribution.
• A family is unhappy with the financial institution that handles their TFSA. They close their account, withdraw their funds and deposit the amount into another bank. This may result in an overcontribution and could have been avoided if the funds had been transferred between institutions, rather than making a withdrawal.
A 12% annual penalty is harsh and can be avoided by understanding the rules. Another advantage of Tax Free Savings Accounts compared to RRSPs is that there is no maximum age to make contributions. RRSP must be closed by December 31 of the year the individual turns 71.
Conclusion – Every family that has not made the maximum contribution to their TFSA, but have investments in a non-registered account, should consider transferring the funds to a Tax Free Savings Account. The lifetime contribution limit is currently $52,000 per person. If they have never used a TFSA, they could deposit $52,000 in the account today and another $52,000 for their spouse
