This Isn’t Good

May 5, 2020 | Blog, Investments | 0 comments

Tax Free Savings Accounts are not good for the government … and that’s exactly why they are great for you!

When we were children, our parents taught us that sharing is good. But sometimes there is such a thing as an “over-share”. That’s when you’re forced to hand over a little bit more than you really wanted to. Sound familiar? It should because often that’s what we experience when it comes to paying taxes.

We all enjoy keeping more of our money, and having a tax-free savings account (TFSA) has allowed us to hold on to $10,000 tax-free for 2015. However, as of January 1st, 2016, the contribution limit on the TFSA will be reduced from $10,000 to $5,500 annually.This means that you will soon lose $4,500 of tax-free savings annually beginning in 2016. But why?

It seems that benefit of the government imposing this reduction is to gain more tax dollars from your income. They recognize that unless they reduce the TFSA limit, the future tax loss potential is huge, so of course they want to limit their loss. This is unfortunate, considering that this rollback will provide Canadians with fewer retirement-income planning options as a result of less tax-free dollars at their disposal. It means that what little “sheltered” income the middle class had for retirement or investing, will be even further reduced. Unfortunately, this practice will be more beneficial to the rich than the poor.

The reality is, TFSAs are good for you in terms of creating tax free wealth … but they are not that good for the government in terms of income loss through tax revenues … and that’s exactly why you should contribute your maximum allowable this year.

And TFSAs should not really be used for short-term emergency funds.   Taking from your balance prematurely can ruin all the compound gains. It is more beneficial for longer term retirement planning. And finally, maximize TFSA before your RSP unless you are in a high tax bracket, and in that case do both!

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