8 reasons why you can save your retirement income in TFSA

You must have often come across the saying, 'Age is just a number'. However, it catches up with you after a certain time, and that is when retirement savings can come in handy.

In Canada, people often get confused while selecting an account for retirement savings. According to a 2020 Fidelity Investments survey, only 51 per cent of Canadians aged 45 or more had an intention to use a Tax-Free Savings Account (TFSA) for retirement income and viewed it as a short-term savings account.

Meanwhile, they leaned more toward Registered Retirement Savings Plans (RRSPs) for retirement planning, suggested the Fidelity Investments survey.

However, we cannot write off the TFSA when it comes to retirement income. Despite its name, a Tax-Free Savings Account is more than just a short-term savings account.

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While TFSA is not a specific retirement savings account, its flexibility can help people use it as an alternative to RRSPs. In this article, we will look at the advantages of a TFSA and on that note, let's first find out what a TFSA is?

What is a Tax-Free Savings Account?

It is a new way for people who are 18 or more to keep tax-free money in an account throughout their lifetime. The Tax-Free Savings Account program began in 2009, and a person only needs a valid social insurance number (SIN) to set up a TFSA.

Notably, money in a TFSA account is tax-free. According to the Government of Canada, any income earned in the account is generally tax-free when it is withdrawn.

Reasons why you could choose TFSA for retirement income

1. As its name suggests, a TFSA is tax-free, and when your investments grow, you don't have to face any tax. Also, if you decide to withdraw funds, there would be no tax on that.

In RRSPs, investment gains are not taxed when they are in the account. However, people have to pay income tax when they retire and make withdrawals.

2. There is no age limit for a TFSA, unlike an RRSP, where there's an age limit of 71 years, and an individual must meet the withdrawal requirements for every year.

In a TFSA, nobody is forced to withdraw their money, and it can be passed to a named beneficiary in case of a death.

3. No government benefits are affected due to a TFSA. If your income is too high, then some government benefits like Guaranteed Income Supplement could be clawed back. Still, your TFSA won't be impacted as it is not necessary to report any withdrawals on tax returns.

Also, TFSA withdrawals don't affect the Canada Child Benefit or Employment Insurance Benefits.

4. A TFSA account is not dependent on your income, and everybody has the same contribution limit of C$ 6,000 per year, and even if you don't have a high income, you are eligible to contribute.

5. The process of withdrawing the money is easy, and an individual is only required to fill out a form with their investment advisor or a financial institution.

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6. Despite a contribution limit of C$ 6,000 per year, the limit keeps growing if an individual has not made a full contribution in the past year. Any unused contribution rooms get added to the total of an individual.

For example, in 2021, you (an 18-year-old) contributed C$ 3,000. Hence in 2022, the contribution limit would be C$ 9,000- which means C$ 6,000 from this year and the remaining C$ 3,000 from the previous year.

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7. If you are married or have a common-law partner, there's an added advantage to a TFSA account. The Canadian Revenue Agency (CRA) allows spouses and common-law partners to contribute to each other's TFSA to maximize the contributions.

8. Unlike a normal savings account, a TFSA offers flexible investment options to people. TFSAs allow people to invest in stocks, bonds, mutual funds, index funds, and cash, among others.

This is an added advantage of a TFSA as not only can an individual earn tax-free money, but they could also earn solid returns on investments.

Bottom line

Retirement planning is important as it allows an individual to get an additional source of income in the later years of life. Also, it helps in dealing with medical emergencies or in fulfilling life aspirations.

If you plan for your retirement, you will always be financially independent as you can avoid getting running out of money.

Please note, the above content constitutes a very preliminary observation or view based on digital trends and is of limited scope without any in-depth fundamental valuation or technical analysis. Any interest in stocks or sectors should be thoroughly evaluated taking into consideration the associated risks.