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TFSA & Couples

When it comes to combining the household income there are two schools of thought.  The first school suggests that couples should refrain from holding joint accounts and must manage their own finances.  They must manage their own credit card bills, mortgages, etc.  The second school of thought suggests that couples should combine their finances.  The advantages are fewer bank accounts, less bills, and a trusting partnership in financial matters.  Whatever school of thought you are following it is always best to ‘start saving early’.  The importance of tax free savings accounts as a good savings solution for couples is explained in the following paragraphs.

Future is uncertain and unpredictable.  As mentioned above, it is always wise to save for future needs.  In this context Canadian couples have an option of setting up a Tax Free Savings Account (TFSA).  According to the 2008 budget, Canadians can contribute to their spouse’s or common-law partner’s TFSA depending on the balance available. The proposed TFSA is a registered savings account that allows Canadian taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes but withdrawals of contributions and earnings from the account are tax free.  A couple may choose to contribute together in this savings account.  This will have the following benefits.

Alternative Income Source

One of the major points of the TFSA is the fact that there is no income test for contributions. Basically what this means is that in a single income home with Jim as the income earner the deposits can go in the wife’s name. This allows investment income splitting. Though attribution rules still apply, if built up properly this could be a way for non-earning stay-at-home parents to get future income for many years.

Reaching the goal of the maximum contribution

Jim had targeted to contribute 5000$ to his TFSA.  At the end of the year he realised that he was short by 1500$. His wife contributed the balance to the savings account.  Next year they decided to do the savings together and each contributed 50% of the maximum contribution.  They were happy that they could make tax free income on their savings account, including capital gains.  Even if, say, after 10 years they wanted to withdraw $50,000 they would not have to pay any tax.  Hence, couples who jointly contribute to a tax free savings account can take full benefits together.  They both can save more, contribute more, and benefit more.

Full Flexibility for contibution rollover and easy Withdrawls

As mentioned before couples who save in a TFSA have the full flexibility to withdraw and re-contribute. The balance of the contribution rolls over to the next year and withdrawals are not taxed.  For example, Gini decides to start a flower boutique (small business) and withdraws $20,000 from her TFSA savings. She does not pay any tax on this withdrawal.  When business picks up, Gini decides to re-contribute the $20,000 to her TFSA. She can easily contribute 20000$ without disturbing the annual balance or the previous year’s contribution rollover.  Hence she can still contribute 5000$ with her husband for that year making it a total of 25,000$.

Another important implication for couples is that a higher income spouse can contribute to a lower income spouse’s TFSA.  The latter can withdraw the money and invest outside the TFSA and get a tax-free gain on the money invested.

Encouraging THE propensity to save

The TFSA is a good savings option for Canadians as it encourages people to start saving early for future needs and goals. Couples may want to save in a tax free savings account for the following reasons.

1.     Saving for the family.

2.     Saving for going to school.

3.     Saving for children’s education.

4.     Saving for buying a house or a car.

5.     Saving for a financially secure retirement life.

6.     Saving for any future contingency.

If you are desperately searching for a good savings option you must consider opening a TFSA with your spouse to protect your future.  Many times, as individuals, it is difficult to meet the challenge of saving all by oneself.  But working together with your spouse can easily make things happen!

The power of collaboration is multiplication and is applicable to all Canadian couples who maintain either separate or combined finances.


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