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Lower TFSA limit in 2016: it doesn’t have to mean less saving

The reduction in the TFSA contribution limit sounds like a setback for Canadians trying to save and grow their investments. Not-so-fast says Investors Group financial planning expert Aurele Courcelles.

“The TFSA offers no deduction as the money goes in, but it offers tax-free income going forward so what you are now losing is $4,500 of tax-free savings room annually, beginning in 2016,” says Aurèle Courcelles, assistant vice-president of tax and estate planning, Investors Group, in a recent Globe and Mail article. “If you had $10,000 available to contribute in 2016, you should be looking at alternatives of where you can put that extra $4,500 that can no longer go into the TFSA.”

Depending on your financial objectives, risk tolerance and time horizon, Aurèle suggests to consider these alternative saving strategies:

  • Registered Retirement Savings Plan (RRSP) – Compared to a TFSA, which is generally good for short-term saving objectives, an RRSP is typically better in the long term: you get a tax deduction now for your contributions while taxes are incurred once the funds are withdrawn. If you start withdrawing RRSP funds when you retire and are in a lower tax bracket, you could be taxed less.
  • Repay non-deductible debt – In many cases, repaying high interest debt can be a form of savings. Interest paid on credit cards, car loans or high-interest lines of credit is typically not tax deductible. Using available funds to reduce this type of debt reduces the interest paid going forward, meaning you keep more of your money.
  • Corporate class mutual funds – Corporate class funds are ideal for non-registered longer-term investment: they allow your money to grow and compound over time. Like an RRSP, corporate class mutual funds enable you to defer paying taxes until you withdraw the funds.
  • Registered Education Savings Plan (RESP) – If you have young children or grandchildren, using the funds you were going to contribute to a TFSA to contribute to an RESP may be the best option. This allows you not only to leverage your contributions if the children are eligible to benefit from the available government grants, but it allows for tax deferred growth inside the plan and income splitting with the children when they pursue post-secondary studies.