As we near the end of 2020, we can feel a collective sigh of relief — this has been an intense year. However, things aren’t over yet, and it’s vital to start looking at your finances and goals for the coming year.
The Canadian Revenue Agency (CRA) has announced a $6,000 limit increase to Tax-Free Savings Accounts (TFSA) in 2021. This increase brings the cumulative contribution space to $75,500.
We’ve spoken in the past about TFSAs. These savings accounts are a relatively new option for Canadian investors, who can use them in various ways. The primary benefit of a TFSA is to allow you to save tax-free—hence the name. Essentially, the money that you place in a TFSA has already been taxed. When you pull funds out, it doesn’t affect the annual income you must claim during tax season. It also means that any revenue gained from investments in a TFSA isn’t taxed—the only exception to that being non-Canadian dividends. This flexibility to pull funds without the same penalties as an RRSP is what makes the TFSA ideal in many situations.
It’s important to start thinking about TFSA accounts and contributions now, as there’s a contribution limit per year. If you withdraw funds from your TFSA, you can reclaim this contribution space the following year. Make sure to consider all your investment options across your diversified portfolio to help you decide how to move and manage your investments within a TFSA.
Since TFSAs are usually used in conjunction with an RRSP, it’s important to remember the deadline for RRSP contributions is March 1, 2021. Utilizing both a TFSA and RRSP will allow you to reduce your income for the year to pay fewer taxes while planning for the future. Doing this can mean you aren’t paying high taxes in retirement if all your money is in an RRSP. Using a TFSA means the money you pull out later won’t affect what tax bracket you land in.
Another major thing to remember about a TFSA is the flexibility of investments within the account. An investor can use TFSAs to invest in mutual funds. However, they can also be self-directed TFSAs, which allow investors to pick and choose their investments. At Cooper Pacific, we offer no-fee TFSA accounts directly to our investors. That means no fees on the application, transfers, withdrawals, etc. If you have a registered TFSA, you can still invest in one of the MIC-managed mortgage pools, but there will most likely be fees through the outside trustee.
If you have more questions and want to take advantage of this increased room for investment through a TFSA in 2021, get in touch with Jordan on our team today.