I got a really awesome email this morning from a friend who said, “Happy TFSA Contribution Day!” which he followed up with, “It makes working on January 2nd a little more bearable.” Loved it! Indeed, it is a strangely exciting time for me when I have the ability to take advantage of the annual gift of new contribution room (I’m such a dork).
A new year brings us new financial savings opportunities which you should not miss out on! Here are a few of the most important:
1) Tax Free Savings Accounts (TFSAs)
- New contribution room for 2014 is $5,500. Contribution room is not dependent on earned income.
- Total contribution room since the advent of TFSAs is $31,000. If you haven’t contributed yet, this is the maximum you can put in.
- Consider making an in-kind contribution from a non-registered investment account that you might have. (Move cash, bonds or stocks from your non-registered account to your TFSA. Beware of possible tax implications!)
- Note: TFSA contributions do not give you a tax deduction, but any growth in the account does not attract any tax, nor do any withdrawals.
2) Registered Retirement Savings Plans (RRSPs)
- Maximum contribution room for 2014 is $24,270. Contribution room IS dependent on last year’s earned income.
- Your personal contribution room for 2014 is based on 18% of your earned income in 2013, to a maximum of $24,270. This contribution room is also reduced for any contributions made to a pension plan that you may be enrolled in through work.
- Check your Notice of Assessment from your 2012 tax return to get an estimate of how much you might be able to contribute, if your income has not changed by much.
- Note: RRSP contributions DO give you a tax deduction and growth in the account does not attract any tax. Withdrawals made down the road are 100% taxable (with the exception of loans made through the Home Buyers Plan and Lifelong Learning Plan).
Like I mentioned in my prior post Busted! The #1 Financial Myth I hear,(http://moderncentsability.com/2013/11/09/busted-the-1-financial-myth-i-hear/), make sure you understand the difference between the two types of accounts and what they can do for you.
Another thing that I see often is people who ‘invest’ into a TFSA by putting it into an ING account or high interest savings account. The best use of a TFSA is NOT as another bank account! It is the best investment vehicle that we have for tax sheltering and deferral. Take advantage of that by actually making investments (in mutual funds, bonds, stocks, and/or ETFs) inside the account instead of keeping it in cash (which is really not ‘saving’ you any tax since the interest you earn is so low)! Otherwise, you’re probably better off paying off debt (on which interest you pay will be typically higher than the interest you would earn in a TFSA!). See the graphic below if you want an example of what I’m talking about.
Don’t delay today on figuring out your investment plan for 2014!
- What TFSA can do for you (joetablan.wordpress.com)
- RRSP’s and TFSA’s advice for youth (pepesha33.wordpress.com)
- What is the difference between an RRSP and a TFSA? [Part 2] (ryanjones305.wordpress.com)