Last week we mentioned the Tax Free Savings Account contribution limit was increased to $6,000 for 2019. Contributing early on, say this month, isn’t always easy.
Holiday bill payments, installment payments, debt payments and regular bills are all competing against your hard-earned dollars.
Below are a few tips I’ve learned over the years that have helped people contribute early.
Every person’s situation is unique and the right strategy involves a discussion with your adviser.
1. If you have extra money in a savings or chequing account, then writing a cheque is the simplest strategy. If you want to contribute early, you could send your adviser a post-dated cheque (dated in 2019) for early January. When we are meeting with clients in the last quarter of the year, we have a conversation with respect to whether they have funds that they wish to deposit, or if they would like to explore other options.
2. For all clients who have a non-registered investment account, it is possible to transfer cash, or securities in-kind, from the non-registered account into your TFSA. An adviser is not permitted to transfer funds between accounts without obtaining the client’s permission. For example, if a client owned Toronto Dominion common shares in her non-registered account, we could move $6,000 in market value of those shares in-kind to her TFSA. Care should be taken prior to executing in-kind transfer to ensure you understand the tax consequences. If a security has a large unrealized gain, the proportionate part of the gain would be realized when the shares are transferred into the TFSA. On the flip side, if you have a large unrealized loss, the loss would be denied under the superficial-loss rules if transferred from a non-registered account to a TFSA. It is always possible to sell some of the investments in the non-registered investment account and transfer cash if no good in-kind options exist. The benefit of this strategy is the client does not have to send us funds from their bank accounts.
3. If you are already at the age where you are withdrawing funds from a RRIF, then it may make sense to do the withdrawal early in the year, versus waiting until the end of the year. Before the TFSA, if clients did not need the RRIF withdrawal elected amount, it was typically advised to defer the RRIF payment until later in the year. Growth in a TFSA is better than growth in a RRIF. Any growth in a RRIF is fully taxed when the funds are withdrawn. Any growth in a TFSA is not taxed. If your RRIF payment is greater than $6,000, then consider taking a partial payment early in the year to fund the TFSA.
4. Budget the funding of a TFSA as if it were an annual expense. If every month you had put aside $500 for TFSA savings, you would take the pressure off of coming up with the money all at once. Forced savings is one of the most important strategies for accumulating wealth. Savings become more manageable when you “force save” on a monthly basis. If you have not budgeted for the current year TFSA, ask your adviser about setting up a pre-authorized contribution.
5. Ask your employer if they have a group TFSA. This is better than forced savings often at times, but not always. They may have a program that is not matching. Many of the employer TFSA programs are matching, meaning that whatever amount you put in (normally up to a maximum), your employer will match. Please note that your contribution, and the amount the employer matches, both use up your contribution room. In some cases, employers offer flex credits that if not used for things such as health benefits, can be applied to a TFSA.
6. Canada Revenue Agency permits other family members, including your spouse, to give you funds without the attribution rules kicking in. If you are considering gifting funds to younger generations, then suggesting that they use these funds for a TFSA might be a great strategy for tax efficient investing as a family.
7. Investment loans are another way to fund a TFSA. The interest is not deductible, and this strategy has a higher degree of risk. Understanding the risks of leverage when investing should be fully understood before considering this strategy.
Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250.389.2138. www.greenardgroup.com
Next week: Understanding TFSA beneficiary terminology