As the R.R.S.P. contribution deadline approaches many taxpayers are faced with the dilemma "how do I find the cash flow to maximize my contribution and tax deduction?". With a plan and attention to cash flow over the entire year, the Tax Free Savings Account (T.F.S.A.) may provide the answer.
Canadian investors are aware of the tremendous flexibility and opportunity to earn investment income and capital gains in a T.F.S.A. One opportunity is to use profits from a T.F.S.A. to fund the R.R.S.P. contribution. Let's look at a simplified example to see how it may work.
As of 2014, the maximum amount of capital that may be contributed to a T.F.S.A. is $31,000. The taxpayer may not have made the full contribution to their T.F.S.A. but let's assume they have $10,000 in the account. We'll also assume the taxpayer has a $4,000 R.R.S.P. contribution limit for the current year. Using the 8% per year long term rate of return for the stock market, the $10,000 would yield $800 tax free. The $800 can be used to supplement the required cash flow to make the annual contribution to an R.R.S.P. account.
This might not seem like a significant amount, but in ten years it's $8,000 which is the equivalent of two full years of R.R.S.P. contributions.
If an investor had earned 8% on maximum allowable T.F.S.A. contributions, of $31,000, the net gain of $2,480 could be used for the R.R.S.P.
The effectiveness of this strategy is dependent on a number of variables most of them related to the taxpayers circumstances. For those who may use the maximum allowable annual contribution, the use of the T.F.S.A. is insignificant in the earlier years, but as contributions to the T.F.S.A. accumulate over time, the profit potential moves closer to the annual R.R.S.P. contribution limit.
Unused T.F.S.A. contributions may be carried forward. In the event a taxpayer receives a sufficient amount of capital, they make contribute to a T.F.S.A. up to the cumulative annual contribution limit.
Sit down and work with your own situation to see how you can engineer a plan over time that improves your ability to fund R.R.S.P. contributions utilizing tax free profit from a T.F.S.A.
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