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|
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: