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6 Reasons Why TFSAs Can Be a Powerful Wealth Builder for Millennials

The Tax-Free Savings Account (TFSA) is a powerful tool for millennials, who should maximize their contribution room to build a tax-free retirement surplus that is potentially increased by the longer compounding time afforded to the young.

Here are six reasons to consider the TFSA tool in tax planning:

1. Family Income Splitting

There is no attribution rule attached to the TFSA because resulting income is tax exempt. So this is a great opportunity for a higher-earning spouse to transfer $10,000 to the lower earner each year for the rest of their lives to equalize savings pools.

Recipients can take the money out, tax-free, for whatever purpose they wish and create new TFSA contribution room in the process. That is, they can take withdrawals and, once they have accumulated new savings, can put those amounts back in future years to grow.

2. Homebuyers: TFSA or HBP?

In the market to buy a first home? Consider whether it makes more sense to withdraw funds on a tax-free basis from within an RRSP to fund a new home purchase under the Home Buyers’ Plan (HBP), or to save the required funds in a TFSA instead and withdraw them from there when needed.

There are no tax penalties for failure to pay back the funds to the TFSA (as there are with the RRSP), and withdrawals automatically create new TFSA contribution room, so investors should consider with their advisor, the possibility of accumulating funds in the TFSA savings vehicle for the purposes of saving for a home, instead of the RRSP.

3. Later-Life Students: TFSA or LLP?

Going back for a second degree? Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds. This is not the case under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP, but requires an annual repayment. If you don’t repay on time under this plan, the amount is included in income and will be taxed.

That tax penalty makes the TFSA a more attractive withdrawal vehicle for later-life students. Better to leave the funds in the RRSP for tax-deferred retirement savings.

4. Education Savings for Minors: TFSA or RESP?

Despite giving up Canada Education Savings Plan Grants and Bonds, the TFSA may appear to be a better savings vehicle for education purposes than the RESP, especially if you start when the child is very young. The latter could eventually attract a significant tax penalty on withdrawal if intended recipients do not end up going to school.

5. Have a pension plan?

Contributors to employer pension plans are often precluded from making the maximum RRSP contribution because of their pension adjustment amount. The TFSA provides the opportunity to make use of another tax-preferred savings opportunity.

6. Self-employed?

Those who have contributed the maximum to an RRSP and want to do more to supplement their savings on a tax-assisted basis, can do so by contributing to their TFSA.


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