TFSA Quick Quote

Thank you for filling out this form COMPLETELY! We value your input as PRIVATE information. Every step has been taken to insure your privacy, security, and our intent is to release quote information only to you. We will not give your data to ANY other person or group for sales, marketing, or ANY other purposes. By checking the box below you agree to allow our agency to release this information via the method you have chosen, and to release us from any liability should this information be accidentally viewed by others. Our intention is to maintain your complete privacy. Get Us The Quote!

Enter code below, here: reload image Thank You!

Daniel La Tour is our Licensed Life Insurance Agent in BC, AB, ON, QC & NB.
For help and advice, contact Daniel La Tour.

GIANCARLO ALFONSO, Marketing Director, Eastern Region, HUB Financial

info@justincaseinsurance.com

With the advent of the new TFSA, one of the questions financial planners will need to address is which plan best meets their clients’ needs. While there are some obvious as well as subtle similarities and differences between the two, each of these accounts holds an after-tax advantage in returns over a non-registered account.

TFSAs and RRSPs are directly comparable in that:

• They do not impose a tax on annual investment income

• There are penalties of 1% per month for over-contributions

• Both require holders to include eligible investments

TFSAs and RRSPs are different in that:

• TFSA holders have to be at least 18 years of age, whereas there is no minimum age requirement for an RRSP.

• The TFSA allows the ability to carry forward contribution room indefinitely following a withdrawal, something which is unfortunately not replicated with RRSP’s (less a few exceptions).

• There is no upper age limit for the TFSA. TFSA’s can last the holder’s ifetime, whereas an RRSP matures when the holder reaches age 71. In order to illustrate the difference between the TFSA, and the RRSP, I have included a study comparing the two. The example used a $1,000 one-time contribution, held for 20 years by an individual with a 40% marginal tax rate. The assumed return, implying a very conservatively managed portfolio was 5.5% compounded annually.

TFSA-RRSP

Pre-tax Income: $1,000-$1,000

Tax (40% rate): $400-$0

Net Contribution: $600-$1,000

Investment Income (20 yrs at 5.5%)

$1,151-$1,918

Gross Proceeds (net contribution + investment income): $1,751-$2,918

Tax (40% rate): $0-$1,167

Net proceeds: $1,751-$1,751

Net annual after-tax rate of return (%): 5.5- 5.5

Source: Finance Department

By the end of year 20, the value of the net contribution plus investment income has reached $1,751 for the TFSA and $2,918 for the RRSP. The great equalizer between the TFSA and the RRSP account occurs at the time of withdrawal. The value of the TFSA remains at $1,751 since no taxes are payable upon withdrawal. Contrary, the $2,918 in the RRSP is taxable at the highest marginal tax rate, which in this case means a tax liability of $1,167. This leaves the RRSP holder with after tax proceeds of $1,751, in line with that of the TFSA. A major determining factor for the RRSP is the tax rate at the time of withdrawal and how it compares to the tax rate at the time of contribution.

Here are three possible scenarios and how each may affect your choice of account:

• If the two rates are identical, as in the example above, the TFSA and the RRSP are equally effective tax-saving alternatives

• If the tax rate at the time of withdrawal is lower than at the time of contribution, the RRSP is the better choice.

• If the tax rate at the time of withdrawal is higher than at the time of contribution, the advantage clearly goes to the TFSA.

While making a choice between the two may sometimes seem complicated, it really isn’t. The important thing to remember is that the TFSA is simply another weapon in your clients’ investment arsenal. Depending on their circumstance, it can be used alone or in concert with other investment vehicles to help them save.