TFSA's - Not Just For Savings, But For Investing
If you are lucky enough to have an employer that provides a pension for you, that’s great. If you do not or if you fear that your pension income will not provide an adequate retirement income, consider building your own.
Did you know that you can build a tax-free pension using a Tax Free Savings Account? A TFSA can hold a wide variety of investments. Some of the most common are Savings account, GIC’s, Stocks, Bonds, Mutual Funds, ETF’s and private equity. Many TFSA’s are setup as simple savings accounts. The very low rates offered in these accounts provide safety & security but very low levels of growth potential.
Building a Pension
Consider Clayton, a 26 year old recent college graduate that is now settled into his first Full-Time job. Clayton has never contributed to his TFSA or RRSP before but has decided to get started since he is now earning a nice living.
Clayton sets up an automatic deposit into his TFSA for $500/month since he is serious about saving for retirement. He invests the money into a growth portfolio and his target rate of return is 7% annually. Clayton plans to increase his contributions by the same amount of increases he gets in his salary (roughly equal to the rate of inflation).
At age 65 Clayton has an account worth $1.75 Million. His Income from that account is well over $10,000/month TAX-FREE. A Tax free income means that the income provided from this account will not increase his taxable income. With a low taxable income, not only will Clayton pay very little tax on other income (likely Canada Pension Plan & Old Age Security), he will not have to worry about his Old Age Security (OAS) being clawed back due to income. Clayton may also be eligible for other government programs like Guaranteed Income Supplement, Carbon Tax & GST Rebates, just to name a few.
Any income derived from an RRSP account becomes fully taxable which often pushes taxpayers income higher tax brackets and causes OAS clawbacks. There is, however great value in the tax deduction generated by the RRSP contributions. A Certified Financial Planner can help you determine what option is best for you.
Talk to a Financial Planner
By following a good plan prepared by a CFP and with a little bit of discipline, you can create your very own pension using TFSAs.
Want to learn more? Contact us today to talk to one of our Financial Planners.