Ep # 86 – Are You Making These 8 Retirement-Wrecking TFSA Mistakes?
Here are the 8 common mistakes retirees and retirement savers make with their Tax-Free Savings Accounts (TFSA). We cover mistakes like over-contributing, misunderstanding withdrawal rules, day trading within the TFSA, and not naming a successor holder or beneficiary.
We provide actionable advice to help you avoid these common pitfalls and help you implement sound strategies so you can optimize the benefits of your TFSA for long-term financial security.
What You’ll Learn in Today’s Episode
Using TFSA as an investment tool: You shouldn’t use your TFSA solely as a savings account. It is an investment vehicle for tax-free growth on interest, dividends, and capital gains.
Importance of RRSPs for high-income earners: Despite some retirees' aversion to RRSPs due to taxation upon withdrawal, we advise high-income earners to utilize them for tax deductions during their working years and potentially lower tax rates in retirement.
Avoiding over-contributions and understanding withdrawal rules: Over-contributing to TFSA can result in penalties, while misunderstanding withdrawal rules may lead to over-contributions, both of which can be avoided through careful planning and monitoring of contribution limits.
Caution against day trading within TFSA: Excessive trading within TFSA may lead the Canada Revenue Agency to consider it a business activity, resulting in taxation on gains, underscoring the importance of a long-term investment strategy.
Naming a successor holder or beneficiary: To streamline wealth transfer and avoid probate, we advise naming a successor holder or beneficiary for TFSA accounts, facilitating a smooth transition of assets in the event of the account holder's passing.
Ideas Worth Sharing
· "While you can use it for a savings account, it's much more beneficial to use it as an investment account because all of the growth, any interest, any dividends paid in that account, it's all tax-free."
· "You're still better off using an actual savings account, probably a high interest savings account somewhere other than the big banks, to accumulate your savings for your emergency fund or opportunity fund and keep your tax-free savings account for longer-term growth."
· "The advantage of naming a beneficiary on your TFSA is that, in the event of your death, it passes quickly to your beneficiary.”
· "Consolidate your TFSAs in one place to make sure that you are maximizing the benefit without taking the chance of over-contribution."
Resources in this episode
5 Costly TFSA Mistakes Retirees Make and How to Avoid Them
Retirement planning can be complicated enough without making costly mistakes with your Tax-Free Savings Account (TFSA). This account offers beneficial tax-free growth, but many retirees undermine these advantages by misusing their TFSAs.
Avoid these common blunders to optimize your retirement savings:
Using your TFSA as just a savings account is convenient, but misses the greater investment opportunity. Consider moving your TFSA savings into higher-return investments like stocks and bonds to accumulate more tax-free growth for retirement.
While TFSAs provide flexible tax-free withdrawals, prioritizing TFSA contributions over RRSPs can shortchange high income retirees. RRSPs enable larger initial tax deductions, deferred investment earnings, and often lower retirement tax rates to maximize your savings. Use TFSAs to supplement RRSPs.
On the other hand, overlooking TFSAs entirely forfeits their tax-free benefits. Assess whether TFSAs could complement your retirement portfolio, especially if you lack RRSP room or expect similar retirement tax rates.
Many retirees overcontribute by misunderstanding TFSA limits and withdrawal rules. Consolidating accounts simplifies tracking to avoid tax penalties. Check your TFSA room on your CRA MyAccount.
Excessive TFSA trading can trigger business income taxes. Maintain a long-term, goal-based investment strategy instead of day trading.
Finally, failing to designate a successor holder or beneficiary on your TFSA risks losing the account’s tax advantages. Name successors so it transfers tax-free upon death.
Staying informed on TFSA rules prevents you from diminishing their retirement and tax benefits. Seek guidance to leverage TFSAs strategically in your retirement plan.