Posted by Tim Stobbs on April 22, 2015
With the cat finally out of the bag we now know a few details of the much rumoured expansion of the TFSA contribution limits from yesterday’s Federal budget (page 232 if you want to read the official text). First off it isn’t a actual doubling of the limit rather it is rising up from the current $5500 per person per year to $10,000. Still that is a huge increase in room, and it takes effect this year. The only downside of the announcement was the fact that they stripped out the inflation adjustment on the accounts contribution room. So enjoy that increase because we are likely not going to see another one for a VERY long time.
Of course a change in Federal government leadership might also trigger this to be a single year event with a roll back in the plan down the road. But for now it is going to happen this year, so let’s look at the potential implications for this in your retirement plan.
To say this is a game changer for some people is a bit of an understatement. A couple can now put away $20,000 per year in TFSA and never pay a dime of tax on growth in those accounts. So the holy grail of retirement planning just got a bit easier: the zero income tax retirement. I’m not sure if you realize this is about your life, but your single biggest bill is likely not your mortgage, but rather your tax bill. Your income tax portion of it can often be a big chunk of change so if you can reduce that in your retirement years you can often speed up your retirement date.
The trick has often been that while the TFSA’s are great ways to invest they don’t often have enough contribution room to make them your sole retirement investment account. For example, if you made $75,000/year as a family your RRSP limit is 18% of your previous year’s income or $13,500. So while the old TFSA limit was close at $11,000 for a couple, now it becomes possible to skip the RRSP entirely for most people and pour everything into a TFSA. (For those with math inclined minds, if your family makes $111,000 per year you can shelter the same amount in your TFSA as your RRSP now).
But what about the RRSP tax refund? Well while that is a nice thing to get you do still have to pay tax on your growth of your RRSP at the other end when you take the money out. While a TFSA you can shelter all the growth from getting taxed. So imagine you have saved well in your life and have a cool $1 million in retirement savings and a paid off house. Now imagine never having to pay a dime of tax on that and not having it reduce your Old Age Security benefits. Cool eh?
So to compare you take our $40,000 a year of income from that in an RRSP you would have to pay tax on that money. The final amount will vary by province but if only one of you take the money out you would lose anywhere from $5800 to $7700 in income tax for 2015. Leaving you with a net spending amount of $32,300 to $34,200. Or you could have put it all in a TFSA and got $40,000 to spend.
In our particular case this means I will likely skip putting money in taxable investing accounts and instead just shelter everything in RRSP and TFSA accounts. While I might need to keep some contributions aside for the last year or two I can then stuff it all in get caught up in no time (ie: likely two years after retirement).
All in all, there is a fair amount of potential in this announcement for your retirement plans. Of course, you should still do some numbers for your particular case to ensure it would be worth it to you. So are you making any changes your plan because of this change? Or you don’t think it will last?