Over the past number of months, the Canadian government has used stimulus spending as its main weapon to combat the impact that COVID-19, and the resulting lockdowns, have had on the economy. This money will have to be paid back at some point and speculation about higher taxes has already begun. One way to prepare for any tax increase is to max out your TFSA (Tax-Free Savings Account).

TFSAs are the most popular specimen plan amongst Canadians, although they are still underused. Contributing to your TFSA is a great plan because you contribute after-tax dollars, and you won’t need to worry about paying tax on any investment gains when you withdraw it down the line, as long as the contribution rules are followed. This means that if/when taxes increase in the future, the money that you have in your TFSA won’t be affected.

RRSPs (Registered Retirement Savings Plans) are also a great tool, but you need to be sure that you will be in a lower tax rate when you withdraw the funds compared to when you initially contributed, and future tax rates are an unknown factor now. Even though RRSPs function well for the vast majority of people, many get frustrated when they have to pay tax on their withdrawals and don’t fully account for this. With TFSAs, the amount that you see in your account is the amount that you will have if you want to withdraw it.

If you are concerned that you might not have a large enough emergency fund saved up, or if you are worried a tax hike could burden your finances, starting to make regular contributions to your TSFA is a brilliant step and you can then have the goal of maxing it out.

The federal government released some 2017 statistics that showed 5.9 million out of 14.1 million TSFA holders did not make a contribution, and only 1.4 million made the maximum contribution. If you have any extra money each month, you should really consider contributing to your TFSA and setting up a regular contribution plan. Along with preparing you for potential future tax hikes, maxing out your TSFA will give you peace of mind knowing that you have a nest egg for the future or an emergency fund for a rainy day.

Please feel free to send this blog post to anyone you think could benefit from it. If you have any questions, please reach out to your financial advisor or myself, Brian Moylett, at bmoylett@wisdomsi.ca, or call/text at 778-951-2806.