Finance Minister, Joe Oliver introduced the government’s 2015 Federal Budget yesterday. The big takeaway is that there will be tax breaks for everyone. Yay! 😀 The proposed budget is expected to get passed as the Tories hold a majority government.
It’s nice to finally see some welcomed changes in fiscal policy to address the economy rather than rely on monetary policy alone. 🙂 Federal budgets are important because it shapes the way we plan our personal finances.
Increased TFSA Contribution Room
The annual contribution limit for the Tax Free Savings Account rises to $10,000 effective immediately. This means Canadians who have already maxed out their TFSA for 2015 will now have another $4,500 of contribution room to use. The TFSA is a holding account where we can buy investments and not pay taxes on the gains.
Some people believe this change will only benefit the upper class who are already wealthy. Here’s my poor attempt at humour on Twitter from yesterday.
TFSA limit raised to $10K/yr from $5,500. What a terrible tax policy to make the rich even richer. I can't wait to take advantage of it. 🙂
— Liquid Independence (@Liquid_f35) April 21, 2015
However, Ottawa says that individuals with annual incomes of less than $80,000 accounted for more than 80% of all TFSA holders at the end of 2013. And about half of TFSA holders had annual incomes less than $42,000, meaning the TFSA is mostly being used by the middle class. Personally I think the new TFSA policy benefits serious savers, not necessarily the wealthy.
RRSP delays taxation to a future date when we’ll likely be in a lower income tax bracket than today. Gains in a TFSA are made from after tax contributions and are not taxed, for the most part. So between the RRSP and TFSA average Canadians now have a lot more freedom and room to save and invest with preferential tax treatments.
Here’s a table showing how much someone would need to save to max out both accounts. The maximum RRSP contribution limit assumes the person earned the same income in the previous year.
Combined Tax Sheltered Savings Table 2015 |
||||
|---|---|---|---|---|
| Annual Gross Income | Max TFSA Room | Max RRSP Room | Combined TFSA/RRSP Limit | % of Income |
| $20,000 | $10,000 | $3,600 | $13,600 | 68% |
| $30,000 | $10,000 | $5,400 | $15,400 | 51% |
| $40,000 | $10,000 | $7,200 | $17,200 | 43% |
| $50,000 | $10,000 | $9,000 | $19,000 | 38% |
| $60,000 | $10,000 | $10,800 | $20,800 | 35% |
| $70,000 | $10,000 | $12,600 | $22,600 | 32% |
| $80,000 | $10,000 | $14,400 | $24,400 | 31% |
| $90,000 | $10,000 | $16,200 | $26,200 | 29% |
| $100,000 | $10,000 | $18,000 | $28,000 | 28% |
As we can see people who make $50,000 a year will have to save more than 38% of their incomes before running out of space in tax advantaged accounts. There is no point in buying GICs, bonds, stocks, mutual funds, and other investments in a regular cash account anymore, unless you’re like me and trade derivatives or buy securities on margin. 😉
Decreased Minimum RIF Withdrawal Rate
The new federal budget also gives seniors more options. When an RRSP is converted into a Registered Retirement Income Fund (RRIF) retirees will be able to leave more money in their tax sheltered account each year to help their savings last longer and can also lower their overall tax burden. The proposed new RIF minimum withdrawal rate will decrease from the current 7.38% at the age of 71, to 5.28% starting at the age of 71, and gradually increase to 20% by age 95. 😄
In general lower income, and younger folks should prioritize saving in a TFSA before considering RRSP, and vice-versa for high income earners. I like to put bonds in my RRSP, and the more volatile, higher potential investments in my TFSA. For most Canadians I believe the TFSA has a more important role in our financial lives than the RRSP. However, both are important as the RRSP can save us money today by delaying the tax liability to future years, while the TFSA can save us money in the future. Holding the right amount of each can minimize the overall taxes we pay over time.
In today’s dollars if someone retires at age 60 with a TFSA portfolio of $500,000 and an RSP/RIF portfolio of $250,000, here is what their retirement might look like:
- They take out $10,000 from a RRIF. This is taxable income but no taxes are paid because it’s below the $11,300 basic personal amount.
- They take out another $20,000 from a TFSA. This is tax free income.
That’s a combined annual retirement income of $30,000 completely tax free. 🙂 On top of this most Canadians will receive government benefits like OAS, GIS, and CPP. The $30,000 withdrawal represents 4% of the entire $750,000 portfolio so it should be sustainable. Furthermore TFSA withdrawals don’t count as income for clawing back old age benefits. This is one reason why the TFSA might be a better option than the RRSP for most people. 😉
By contributing the maximum amount starting now ($10,000/year) it will take 26 years to build a TFSA portfolio worth $500,000, assuming an average investment return of 5%/year over inflation. The earlier we start the better. However the TFSA does not appear to be very popular with the younger generation.
The changes to the TFSA and RIF are essentially tax breaks for Canadian savers and seniors. 🙂
Other 2015 Federal Budget Highlights
- Employment Insurance (EI) premium rate cut from 1.88% to 1.49% starting in 2017, a reduction of 21%. This will keep more money in the pockets of both individuals and businesses.
- EI benefits to care for a sick or dying relative extended to six months from current six weeks.
- A new home accessibility tax credit to renovate homes to make them more accessible for seniors and people with disabilities.
- Small businesses earning less than half a million dollars will see their tax rate cut to 9% from 11% by 2019.
- Industry will see the accelerated capital cost allowance for new equipment extended 10 years.
- Changes to student grant and loan programs to ease eligibility for short-term students and working students.
- $292.5 million for the RCMP, Canadian Security Intelligence Service (CSIS) and Canada Border Services Agency for counter-terrorism.
You may download the full 500+ page federal budget plan for 2015 here.
———————————————————–
Random Useless Fact:
I prefer chipmunks over French cats but that is personnal taste, as far as pictures go anyways.
Interesting that they have lowered the RIF withdrawal rates. I have not seen the complete chart as of yet but it is a bit early. I am sure this will do much to draw out the funds available to seniors in their golden years.
It will be interesting to see how future governments try to dip in to the wealth they are presently allowing people to squirrel away.
Will take advantage of the new TFSA max next week.
Yeah, it usually takes awhile before the full chart is available. Normally I get that kind of information from financial institutions, like the banks would post the full details on their RSP/RIF information page.
Woot woot! More TFSA room! Damn government is good at buying my vote… – Cheers.
You realize they are toying with you? You don’t have to vote for them and we still will have this increase – it has already passed. They promised this 4 years ago before their last election. Now they are giving it at the most opportunistic time before their next one – 4 years too late, in my opinion. Had they given it right away when they got re-elected, or even before, we would have had an extra ~$20,000 room in our portfolios. This is a last ditch effort to try persuade people who have a 6 month memory to vote for them despite all the negative things they have done to our economy, land, and people.
I’m equally interested in how the upcoming U.S. presidential election will play out. 🙂
Pretty happy with the increase in TFSA contribution, now time to save more money and put that into TFSA.
Hopefully this will convince more spenders to save and increase our average savings rate in this country.
I am not a fan of Harper and I am annoyed that I am paying for his wife to live at a hotel instead of with him. I don’t blame her for not wanting to live with him because I can’t imagine why anyone would want to spend any time with him but even though I don’t like Harper I do like the new 6 month paid leave to care for a sick relative. That is very humane.
That may be off the financial track but I pay a lot of taxes out of my $51,000 per year and I don’t seem to ever qualify for any of the tax breaks so I can at least demand that the government tries to minimize their expenditures to reduce my tax burden.
Thanks for your input. 🙂 I make around that level of income as well. Middle class people like us are in a difficult position. We earn too much to receive the GST/HST tax credit or other government benefits, but we don’t make enough income to qualify for the high tax deductions that the upper class can receive by contributing to an RSP. I think this is why we have to be particularly financially savvy with our planning.
We may earn around the same amount but you are much more daring in your investment approach. I put the little bits of money I can scrounge in to ETFs inside my RRSP. I could never take on debt to finance an investment. I wouldn’t be able to sleep at night if I did.
Nice breakdown of the explanation between rrsp and tfsa for the middle income earners. I haven’t contributed this year to my tfsa. Maybe I should move some money around to make the contribution. Still haven’t figured out what is the best for my investments yet…
I tend to favor TFSA a little more than RRSP at this point. I still invest in both, but the TFSA sounds like a better deal over the long run because when we retire we can take money out of our TFSA to spend which doesn’t count as taxable income. This means we can receive higher GIS and OAS payments from the government for being “low income” citizens. 🙂
$28,000 a year between TFSA and RRSP is pretty nice… Better than we can do here in the states… $23,500 is our cap between 401K and IRA.. There is more room to run the 401k up to $53,000 but only in some limited plans that are set by your employer..
Interesting comparison. The TFSA is relatively new here. It only started in 2009 so we’ll see how Canadians use it over time. Right now only 1/3rd of Canadians have opened up a TFSA. Thanks for the U.S. perspective. 🙂
Thanks for the overview. Although I will benefit from the TFSA limit increase, I still maintain it won’t help a lot of Canadians and will hurt us in the long run. I’ve already maxed out my contribution earlier this year when it was $5.5K so I’ll bump up to the full $10K later. I always try to max out both my RRSP and TFSAs annually.
I didn’t know about the accessible homes tax credit. I will look into that. Thanks.
I don’t think you’re wrong about the increased limit doing more harm than good in the long run. General government revenues will certainly face trouble later on because of this. Future governments probably wont tax TFSAs, but they might impose new policies to limit contribution room or the amount you can redeem in one year. To make up for the lost revenue they might raise taxes on other things like earned income or sales tax.
I have a question regarding TFSA. I started investing in TFSA 3 years back and no looking to buy shares from TFSA (Shares that dont pay back dividends). What happens if i sell those shares. Is my capital gain taxable when i withdraw money from TFSA ?
No, there are no capital gains or income tax. That’s why TFSA are awesome.
I concur with Anonymous’ reply. 🙂 Keep a record of how much money you withdraw because you will get that contribution room back in the following calendar year.
As always, thanks for your fun posting. I wanted to let you know that I and probably so many other readers, enjoy your blog.
Cheers!
BeSmartRich
Thanks BSR. I appreciate your positive feedback. 🙂
Thanks for keeping us updated Liquid
Any time! 🙂
Your enthusiasm in investing is always infectious. I got it from you 🙂
I can’t wait to max my TFSA this year.
I might be able to max mine out this year as well. The TFSA is a much better investment vehicle than the RRSP for most people. I think more Canadians will open up TFSAs when they realize all the benefit it offers. But for now at least RRSPs are still more popular.