How to stay ahead of inflation: Contribute to your TFSA early

One of the best features of the Tax Free Savings Account is its flexibility, such as the ability to withdrawal funds without any tax consequence.  If you need funds for short-term goals, such as buying a new car, renovating your home, or taking a holiday, then the TFSA account may be the desired choice for putting cash away for easy access in the near term.

Depending on how you look at it, this feature may not be a benefit.  A person first has to decide how they want to fund their retirement.  It may be too easy for people to dip into their TFSA.  There is no tax consequence for withdrawals and people may replenish the account in subsequent years with no penalty.

For most people, the main purpose of an RRSP is to provide retirement income in the future.  The very purpose of this account is designed for a long-term goal, and not for short-term goals.  Due to RRSP contributions being tax deductible, there is a limit to how much you can contribute.  All RRSP withdrawals are considered taxable income.  A young person withdrawing an RRSP early would have to pay tax on the dollar amount taken out.  This provides an incentive for people to leave the account for its original purpose.  Withdrawals from an RRSP account should generally be the last resort for people needing cash.

If a person makes a withdrawal from their RRSP they are not able to get the contribution room back.  It is lost permanently – it is not replenished like the TFSA.  The tax consequence and the lost room are two key reasons people are encouraged to keep RRSP funds for retirement.

In an earlier column we mentioned how we like the TFSA more then RRSPs for people in the lower income tax brackets.  We also like the idea of people beginning to save for retirement early in life.  The key thing that young people can note is that although this is a “savings” account, you should consider using this for a retirement account.  The TFSA annual contribution limit will keep pace with inflation, rounded to the nearest $500 increment.  The follow chart highlights some simple compounded growth assuming 3 per cent inflation and investment growth of 6 per cent:

Age

19

 Inflation

3.00%

Return

6.00%

     

               

Age

Year

 Inflation Amount

Limit (Nearest $500)

TFSA Beginning Balance

Annual Contribution        

Subtotal

 Investment Return

TFSA Ending Balance

 

 

 

 

 

 

 

 

 

19

2009

      5,000.00       5,000

0

          5,000          5,000        300.00          5,300

20

2010

      5,150.00       5,000        5,300           5,000         10,300        618.00        10,918

21

2011

      5,304.50       5,500       10,918           5,500         16,418        985.08        17,403

22

2012

      5,463.64       5,500       17,403           5,500         22,903      1,374.18        24,277

23

2013

      5,627.54       5,500       24,277           5,500         29,777      1,786.64        31,564

24

2014

      5,796.37       6,000       31,564           6,000         37,564      2,253.83        39,818

25

2015

      5,970.26       6,000       39,818           6,000         45,818      2,749.06        48,567

26

2016

      6,149.37       6,000       48,567           6,000         54,567      3,274.01        57,841

27

2017

      6,333.85       6,500       57,841           6,500         64,341      3,860.45        68,201

28

2018

      6,523.87       6,500       68,201           6,500         74,701      4,482.08        79,183

29

2019

      6,719.58       6,500       79,183           6,500         85,683      5,141.00        90,824

30

2020

      6,921.17       7,000       90,824           7,000         97,824      5,869.46      103,694

31

2021

      7,128.80       7,000     103,694           7,000       110,694      6,641.63      117,335

32

2022

      7,342.67       7,500     117,335           7,500       124,835      7,490.13      132,326

33

2023

      7,562.95       7,500     132,326           7,500       139,826      8,389.53      148,215

34

2024

      7,789.84       8,000     148,215           8,000       156,215      9,372.90      165,588

35

2025

      8,023.53       8,000     165,588           8,000       173,588    10,415.28      184,003

36

2026

      8,264.24       8,500     184,003           8,500       192,503    11,550.20      204,053

37

2027

      8,512.17       8,500     204,053           8,500       212,553    12,753.21      225,307

38

2028

      8,767.53       9,000     225,307           9,000       234,307    14,058.40      248,365

39

2029

      9,030.56       9,000     248,365           9,000       257,365    15,441.90      272,807

40

2030

      9,301.47       9,500     272,807           9,500       282,307    16,938.42      299,245

41

2031

      9,580.52       9,500     299,245           9,500       308,745    18,524.72      327,270

42

2032

      9,867.93     10,000     327,270          10,000       337,270    20,236.21      357,506

43

2033

    10,163.97     10,000     357,506          10,000       367,506    22,050.38      389,557

44

2034

    10,468.89     10,500     389,557          10,500       400,057    24,003.40      424,060

45

2035

    10,782.96     11,000     424,060          11,000       435,060    26,103.61      461,164

46

2036

    11,106.45     11,000     461,164          11,000       472,164    28,329.82      500,494

47

2037

    11,439.64     11,500     500,494          11,500       511,994    30,719.61      542,713

48

2038

    11,782.83     12,000     542,713          12,000       554,713    33,282.79      587,996

49

2039

    12,136.31     12,000     587,996          12,000       599,996    35,999.76      635,996

50

2040

    12,500.40     12,500     635,996          12,500       648,496    38,909.74      687,405

51

2041

    12,875.41     13,000     687,405          13,000       700,405    42,024.32      742,430

52

2042

    13,261.68     13,500     742,430          13,500       755,930    45,355.78      801,286

53

2043

    13,659.53     13,500     801,286          13,500       814,786    48,887.13      863,673

54

2044

    14,069.31     14,000     863,673          14,000       877,673    52,660.36      930,333

55

2045

    14,491.39     14,500     930,333          14,500       944,833    56,689.98    1,001,523

56

2046

    14,926.13     15,000  1,001,523          15,000    1,016,523    60,991.38    1,077,514

57

2047

    15,373.92     15,500  1,077,514          15,500    1,093,014    65,580.86    1,158,595

58

2048

    15,835.13     16,000  1,158,595          16,000    1,174,595    70,475.71    1,245,071

59

2049

    16,310.19     16,500  1,245,071          16,500    1,261,571    75,694.26    1,337,265

60

2050

    16,799.49     17,000  1,337,265          17,000    1,354,265    81,255.91    1,435,521

We caution everyone who looks at the above table to understand projections, returns, and inflation.  The term real rate of return factors in taxes and inflation.  As the TFSA has no taxes, the real rate of return above is three per cent (six per cent return less three per cent inflation).  The inflation component can be illustrated by looking at the inflation amount in the year 2050.  We project that in 2050 one would need approximately $16,799 to purchase the same equivalent items that $5,000 could purchase today.  In other words, young people today will have to become millionaires in the future to fund a modest retirement.