homepage
Get Your Free Tfsa Report
Name:
Email:
 
 
Your Income Range
Regular Investment
$
Rate of Return
Lump Sump
$
Term of Investment
  (In Years)
 
For illustrative purposes only, not for financial planning. Please read the assumptions.
 
Tfsa Information
 
 
Further Reading
 
Stay informed
Subscribe Using RSS
 
Tags

Posts Tagged ‘example’

How To Maximize your Tax Free Savings Account

April 8th, 2010

How To Maximize your Tax Free Savings Account

It is one thing to be provided with a gift, and quite another to learn how to make the most use of it.  A common complaint is the dearth of cash, especially after the holiday season.  Ottawa’s answer to this was the Tax Free Savings Plan, introduced in the 2008 federal budget, effective from 2nd January 2009. Many are aware of this financial innovation, yet, not everyone has the savvy to optimize it. Studies actually bear this out. It is advisable to educate oneself in order to benefit to the greatest extent possible from the TFSA.

So many thousands of people signed up for this account since October 2008.  Home prices fell, and so did the stock markets, bringing RRSP values down too.  Canadians seem to be realizing the importance of saving money for a rainy day as well as personal splurges. It has been predicted that Canadians would sock away up to US $ 115 billion over 5 years from 2010.

Yes, one can put away money, but how does one maximize one’s savings?  Especially during the proverbial post-holiday cash crunch, as in the aftermath of an extravagant December of the previous year!  Financial experts have come up with ways to work the TFSA to everyone’s advantage. Very few investors are aware that contributions in kind are permissible, like stocks.  To elucidate, if someone cannot come up with $5000 cash, he or she can transfer a non-registered investment into the account.

There are pros and cons to doing this and one must be conscious of the tax repercussions.  Opting for this course of action eliminates the need to come up with cash, at the same time, if a stock is transferred at a higher price, the gains are taxable, but if transferred at a lower price than what was paid, a tax loss cannot be claimed. Here, one can sell the non-registered stock, invest the money in the TFSA and wait 30 days so the loss rules elapse (which would apply if an identical stock was purchased)

Another key optimization strategy was the swap.  If an investor had $5000 in a TFSA and $5000 in stocks and wished to free up some cash for some purchase, he could withdraw the cash and replace it with the stocks of the same value. This facility increases the wealth growth aspect of the TFSA. How does this happen? It is best illustrated with an example: Say a person takes $5000 out of his account in cash and replaces it with $5000 of stocks.  The stocks appreciate in value to $20,000 (in an ideal world!). If the stocks are withdrawn at this point, it leaves a residual contribution room of $20,000!

The downside to this would be the waiting period until January of the following year before the investor can re-contribute, thus losing tax-free growth in the interim. The smart thing to do here would be to swap the stocks for cash, thereby capturing the new contribution room. (It should be noted here that a TFSA swap is likened to an RRSP swap. Both feature acquisition and disposal of property at fair market value.  Capital gains arising are taxed; capital losses cannot be claimed).

Unfortunately, the Finance Department has recently introduced an amendment whereby swaps have been banned, as some overuse of this avenue was noted.  But one can still sell assets in one account and re-buy them in the TFSA and withdraw, thus minimizing the tax burden, but this is the more expensive route than swaps.

Another option is to sell the stock in the TFSA for $20,000.

So a TFSA is more than just an account into which one deposits $5000 and forgets about it.  As can be seen from the above, one can use creativity and generate more wealth than that from tax savings alone.

Advice | , , , , , , , , , , , | No Comments »
 
 
 
 

TFSA&Kids »

 
Find the latest information about the TFSA
  More Details
 

TFSA Couples »

 
Learn the best strategy for your partners TFSA
  More Details
 

TFSA Seniors »

 
Read more about your retirement and the TFSA
  More Details