TFSAs work for working people too

Don’t be swayed by the criticism: TFSAs are an accessible savings tool that helps you build wealth now

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Practical money advice for the real world
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CALGARY, AB, May 19, 2015/ Troy Media/ – In the last few weeks, some Canadian politicians have attacked Tax Funded Savings Accounts as a tool rich folks use to sock away fortunes without paying taxes. They’re unhappy that the maximum amount Canadians can contribute to TSFAs is increasing to $10,000 annually.

While the government legislation may indeed need to be modified to ensure this program is not abused – what government program doesn’t need tweaking now and then? – most critics of TFSAs don’t tell you the whole story.

TFSAs are not just for rich folks.

TFSAs better than buying on credit

They are a savings tool that can be used by Canadians across the economic spectrum. According to the Government of Canada, the “TFSA allows Canadians to set money aside . . . and watch those savings grow tax-free throughout their lifetimes.” TFSA savings can be used for any purpose, such as to purchase a new car, renovate a house, start a small business or take a family vacation.

In other words, TFSAs encourage Canadians to save for large purchases instead of buying on credit. Of course it’s true that wealthy Canadians can afford to save more money. But lower income Canadians – people too poor to get much tax-saving benefit from socking cash into an RRSP – are even more reliant on TSFAs to build their wealth.

tfsasIf your working income is low, you won’t get the post-retirement tax break rich folks who invest in RRSPs do. And you really can’t afford to pay interest charges on loans.

Here’s how TSFAs work for Canadians with lower incomes.

RRSP contributions lower your tax rate in the year you save the money. So, if you are a high income Canadian it makes sense to contribute to an RRSP while you are working, because those contributions lower your taxable income. You only pay tax on money you put into an RRSP when you withdraw it.

You cannot lower your taxable income by contributing to a TFSA, but you do not have to pay taxes on the money when you withdraw from it, and you don’t pay tax on the interest you earn in a TFSA.

High income earners usually find themselves in a lower tax bracket after they retire. So they benefit from RRSPs by deferring taxes during their highest earning years and paying a lower rate of tax when they withdraw the money after they retire.

Lower income earners who save their money in an RRSP may find themselves paying more tax than they did during their working years. They may not qualify for federal income-tested benefits and credits, such as the Guaranteed Income Supplement, once they retire. Even worse, if they lose their jobs or need to access their savings for an emergency, they will wind up paying tax on money they withdraw to weather their financial crisis.

Higher income earners may choose TFSAs to save for large purchases, but they are better off putting their retirement savings into an RRSP which lowers their tax burden now and builds wealth that will get them through 25 or more years of retirement.

Don’t be swayed by rhetoric. TFSAs are an accessible savings tool that helps you build wealth now.

Don’t listen to the naysayers

Politicians who tell you that TFSAs are for rich people who want to avoid paying tax on their investments aren’t telling you the whole story. If you are a low-to-moderate income Canadian, a TFSA can help you build wealth and stay out of debt as you save for large purchases, your kid’s education, or even your retirement.

Getting rid of TFSAs could be a disaster for the very voters the politicians criticizing them claim to want to help, Canada’s working class.

Jane Harris-Zsovan offers her readers practical money advice for the real world. Jane is the author of Eugenics and the Firewall: Why Alberta’s UFA/Social Credit Legacy Matters to 21st Century Canadians.

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