What to do with your TFSA (before Trudeau trims it)

Well, it happened. The Liberals have won a majority, and now it’s time for Justin Trudeau to make good on all the party promises he made—including his pledge to trim the annual Tax-Free Savings Account (TFSA) contribution limit from $10,000 to $5,500, starting in 2016. For many Canadians, that raises some questions. Such as: What should you do with your TFSA in the meantime? Should you scramble to top up your TFSA today, in case it shrinks tomorrow? And how will this affect my savings goals? Relax. You can top up your TFSA when and if you can and put that money to work for you by investing it wisely. If it means waiting until next year, don’t sweat it. Trudeau is unlikely to tamper with contribution limits retroactively. To date, any adult over the age of 24 has accumulated $41,000 of tax-sheltered contribution room, and that’s not going to change. In 2016, it’s still likely to grow to $46,500 (as oppose to $51,000) with the promised changes. Even if the Liberals had pledged to claw back the extra $4,500 in contribution room afforded to Canadians this year, savers wouldn’t have been penalized for it, Keith MacIntyre, national tax practice leader at Grant Thornton LLP, told Advisor.ca. “There is no tax on withdrawal,” he said. “People aren’t going to face any tax burden for it.” And while the loss of the $10,000 annual TFSA will cost high-income earners who can afford to top it up each year (they’d be able to net $53,700 more on your investments over 30 years at the current limit), it won’t affect their wealth by nearly as much in the short term, says Graham Westmacott, portfolio manager at PWL Capital in Waterloo, Ont. Assuming a 5% return and 30% tax rate, the difference in actual tax savings per year would be less than $70, he told Advisor. “No one’s going to be retiring a year later or selling a yacht based on the TFSA change.” The TFSA may not turn out to be quite as powerful a wealth building machine as many of us would have hoped, but it’s still a force to be reckoned with. There’s no other savings vehicle in the country that allows Canadians to grow their money tax free and access it any time without penalty. It’s especially advantageous to lower income Canadians because, unlike the Registered Retirement Savings Plan (RRSP), contribution room is not contingent on earnings; all Canadians have the same allowance. Of course, if you’ve already maxed out your TFSA, good for you. You’ll want to find other tax efficient ways to invest your money. There’s always RRSP which offers a tax-deferred rebate on contributions or, if you’re investing in a non-registered account, consider Canadian dividend-paying stocks which are given preferential tax treatment.