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Carrick on money

Are TFSAs and RRSPs just tax relief for high earners? Add to ...

Tax-free savings accounts and registered retirement saving plans are supposed to encourage people to save more. But one of the fathers of the TFSA questions whether this is happening. Rhys Kesselman, now the Canada Research Chair in Public Finance at Simon Fraser University, said the tax breaks available from TFSAs and RRSPs don’t seem to be motivating middle-income people to ramp up their saving.

As a result, it’s arguable that the benefit of these programs flows mainly to higher income people. “A lot of it is tax reduction without necessarily significant – in the aggregate – additional saving,” Mr. Kesselman said in interview with CBC.

Mr. Kesselman and a colleague first proposed the TFSA back in 2001. Today, he warns that changes may be ahead for the program. For example, he said it’s likely the government will address a rule allowing people to accumulate huge TFSA balances and then make withdrawals in retirement that don’t trigger Old Age Security clawbacks.

TFSAs were introduced in 2009 and the cumulative annual contribution room over the years totals $52,000. However, the Canada Revenue Agency has confirmed that there are already some million-dollar TFSAs. The more success people have in building their TFSAs, the more pressure may build for the government to make them less generous.

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My reply: “Yes, provided you get those guaranteed investment certificates from alternative banks, trust companies or credit unions offering premium rates compared to the big banks. GICs can’t easily be sold before maturity, but they don’t fluctuate in value in your account. You won’t see losses in the value of your holdings if interest rates rise, but you also won’t see gains if rates fall. Here’s a website to compare GIC rates. By the way, laddering generally means dividing your money evenly into GICs maturing in one through five years. When a GIC matures, you reinvest the money in a new five-year term.”

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