TFSA Account, Something that everybody should know. - Page 8

Do make charitable contributions by Dec. 31. The media is full of stories about charities falling short of their fund-raising goals and cutting services to the needy as a result. Here’s an opportunity to help ease someone’s misery and save some tax dollars next April. Just make your contributions before the stroke of midnight on New Year’s Eve.
Fortunately, it’s easy. Most charitable organizations have user-friendly donation pages on their websites. You can click on them any time, make a donation by credit card, and receive a receipt in your email in-box almost instantly.
The tax pay-off gets better the more you give. For the first $200, you receive a 15 per cent federal tax credit plus the provincial/territorial credit. After that, the federal credit jumps to 29 per cent. Factoring in the provincial/territorial credit, your total tax saved will be in the range of 40 per cent. Plus, you’ll have the satisfaction of knowing you made someone’s life a little better.
Don’t make unneeded RRSP/RRIF withdrawals. If you require money from a retirement plan, postpone the withdrawal until the New Year if possible. The payment will be treated as taxable income no matter when the money comes out but if you wait until after Jan. 1 you won’t have to declare it until you file your 2011 return in April 2012. There will still be withholding tax on the withdrawal but that is usually less than you’ll actually be required to pay on filing when you’ll be assessed at your marginal rate. By postponing the withdrawal, you’ll have the use of that extra money for more than a year. (One exception: you must take out the annual minimum withdrawal from a RRIF before year-end, whether or not you need the money).
Do consider tax loss selling. Despite the weak economy, stock markets have had a respectable year. As of the close of trading on Dec. 8, the S&P/TSX Composite Index was ahead 12.8 per cent for 2010, a better performance than most people expected last January. That comes on top of a 30.7 per cent advance in 2009, so equity investors have been doing quite well lately. If you’re one of the fortunate ones and have taken some profits along the way, you should consider tax-loss selling before year-end to offset your gains. Any clunkers that have little chance of a bounce-back in the near future are obvious candidates.
Allowable capital losses can be used to reduce your taxable capital gains dollar for dollar so the savings can be substantial. Any type of money-losing security can be used: stocks, ETFs, mutual funds, income trusts, bonds, etc. Just be sure to initiate the sell order by Dec. 23, otherwise it may not go through before year-end. If you’re really in love with the stock you can buy it back in the New Year. Just be sure to wait at least 30 days, otherwise the Canada Revenue Agency won’t allow the loss.
That’s it. You can now go back to your gift shopping. And Happy Holidays!

Tax-free accounts may be better than RRSPs




For many Canadians – particularly those with a low income – Tax-Free Savings Accounts (TFSAs) may be the best way to save for retirement, according to a report released Thursday by Jamie Golombek, tax and estate planning expert at the Canadian Imperial Bank of Commerce.
The report runs counter to the two-month-long rush at the beginning of each year known as RRSP season.
It shows that given identical tax circumstances, compounding, and dates of contribution and withdrawal, the amount of after-tax cash that can be accumulated within an RRSP or TFSA is identical.
Those who can afford to contribute to both an RRSP and TFSA should do so, but the reality is that most Canadians don’t have enough cash to do both each year, Golombek points out.
If you have a high income during your working years and expect that to drop in retirement, an RRSP may be best.
But if the opposite is true, a TFSA may be the better choice, Golombek writes.
Canadians typically rush to put money into an RRSP in order to qualify for a refund on their income taxes, a phenomenon Golombek calls “Blinded by the refund.”
“Conventional thinking seems to have steered most Canadians towards the tried and trusted plan, the RRSP, at the expense of the TFSA,” Golombek writes.
In the report, Golombek compares a $5,000 contribution to an RRSP. No tax is paid when the money is deposited. Assuming a 5 per cent rate of return, that would grow to $13, 266 after 20 years. If the tax rate at the time of withdrawal is 40 per cent, the net cash from that investment is $7,960.
Compare that to a $3,000 contribution to a TFSA – that’s $5,000 before the 40 per cent tax rate takes $2,000 off the top. It grows to $7,960 after 20 years with a five-percent annual return. Since no taxes are due when the money is withdrawn, the net cash from the investment doesn’t change – and is equal to the proceeds from the RRSP.
Here’s the worst part for those with a low-income in retirement: even modest withdrawals from an RRSP can affect government benefits and tax credits such as the Guaranteed Income Supplement (GIS), Old Age Security (OAS) Benefits, the Age Credit or the GST/HST credit.
The TFSA has a clear advantage here – since withdrawals from a TFSA are not considered to be “income,” they have no impact on those benefits.
Starting in 2009, Canadians ages 18 and over can contribute $5,000 a year into a TFSA. Those who open one this year can immediately contribute $15,000 because the unused contribution room from previous years accumulates.
Like an RRSP, investment income from the cash, stocks, bonds, or mutual funds held in the TFSA is not taxed.
Withdrawals from a TFSA can be made at any time for any reason, though you have to wait until the next calendar year to put the funds back in the account.
Contributions made to an RRSP reduce your taxable income – hence the tax refund – but taxes are due with your take out the funds at retirement.
Make withdrawals early or for a reason other than funding your education or buying your first home, and you’ll be hit with hefty withholding taxes.
And what about that tax refund from your RRSP?
Don’t think of it as a windfall, but simply the “present value of the future tax payment that will have to be made on the RRSP withdrawal,” Golombek says.
The best option is to consult a financial advisor or accountant who can help run the numbers and consider your unique situation.
“Ultimately, an individual’s specific financial circumstances and long term retirement goals will determine which vehicle is most advantageous,” Golombek said. “Perhaps with some financial guidance and a better understanding of how these new savings vehicles work, TFSAs may become the retirement vehicle of choice for many more Canadians going forward.”