Investment for Canadian Employees PART 4 – TFSA

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Tax Free Saving Account, aka TFSA!

TFSA is a very useful and important program for employees in many ways. Currently, a maximum of $88,000 can be saved per adult, and all investment returns from the account are tax-free. The maximum limit is currently increasing every year.

The amount you can save may increase or decrease depending on the situation, so check the exact amount on the CRA site .

If you earn investment profits by investing in a general account, 50% of the investment profits (capital gain) becomes taxable income and must be reported and paid during tax return.

For example, if a person receiving an annual salary of $80,000 in Alberta earned $20,000 in investment income that year, he or she must report that he or she received $90,000 by adding $10,000, which is half of $20,000, and the Marginal Tax on the annual salary of $80,000 is 20%. You must pay an additional tax of $2,000, or 20% of $10,000. If your annual salary is over $100,000, your tax bill will be $36,000.

With a TFSA account, you can purchase all investment products such as stocks, deposits, bonds, and funds. And unlike RRSPs, you can take it out whenever you need it without penalty. Although the amount is limited, a combined $170,000 for a married couple is a considerable amount of money for investment.

Precautions when using TFSA

One thing to keep in mind when using TFSA is that if you contribute more than the maximum amount per individual, a 1% penalty will be charged each month on the amount exceeded. Taking money out of your TFSA does not increase your maximum contribution . Regardless of the amount subtracted from the account, check whether the maximum accumulated amount has been exceeded using the amount accumulated during the year. At first, it is easy to make a mistake and end up spending more than the maximum amount.

Every year on January 1st, the amount added and subtracted from the previous year is calculated and reset.

But when you look at TFSA, most people think this way.

Should I invest in a TFSA or an RRSP?

TFSA vs RRSP

If you look at YouTube or blogs, there are many articles on the topic of TFSA vs RRSP.

These are all logically correct, but in the end, I feel like I don’t know. This is not talking about annual profits, but what will be lower when you retire, 20 or 30 years from now. Honestly, how can I know what kind of status I will be in 20 years from now?

Simply put, both don’t charge taxes on investment returns (TFSAs may pay some taxes in certain cases), but RRSPs seem better because they reduce your Income Tax that year if you contribute them. However, this does not exempt taxes, but postpones them until I retire. What’s really important here is that RRSP means deferring taxes.

The biggest difference is that with a TFSA, you pay taxes now, and with an RRSP, you pay taxes when you save money in retirement.

Let’s do a quick calculation.

I make an annual salary of $100,000 this year and plan to invest $20,000.

RRSP

If you expect to receive a roughly 30% tax refund with a $20,000 Income Tax reduction, you can invest $26,000.

If you invest for 20 years at 8% compound interest, your final return is $121,000.

TFSA

If you pay all taxes and invest $20,000 for 20 years at 8% compound interest, the amount is $93,000.

Now, if you retire here and get that money all at once,

TFSA receives $93,000 as is;

The RRSP is taxable, so you get $ 82,576 (in Alberta).

Let’s say I invested in Tesla with a TFSA 10 years ago. $20,000 became $200,000. If you invested $26,000 in Tesla with your RRSP, it would be $260,000, and after retirement, excluding taxes, it would be $ 162,384 .

Of course, if you do not deduct the entire $260,000 but subtract about $50,000 over five years, the amount could exceed $200,000. If your wife has a low income, you can reduce taxes through Income Split. However, there are many conditions attached. Who knows. Do you suddenly need a lot of money? I got seriously ill and have to spend all my remaining money! I thought so, but if they deducted 40% in taxes, I would be angry.

And after 20 years, your taxes may be reduced. As the value of money falls due to inflation, the Marginal Tax on $100,000 is currently 36%, but it may be 25% at that time.

So, I keep my RRSP full and put any extra money into my TFSA. If you have a lot of money when you retire and have to pay a lot of taxes, that’s good. Having too little money to pay taxes after retirement is a problem, but having a lot of money and having to pay taxes is not a problem.

In the next episode, we will talk about various financial products that are useful for investment.

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