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BMO Bank of Montreal

February 19, 2012 08:00 ET

BMO Retirement Tips of the Day: Take Advantage of the TFSA & Plan Ahead for Possible U.S. Estate Taxes

TORONTO, ONTARIO--(Marketwire - Feb. 19, 2012) - As the February 29th deadline approaches to make a contribution to a Registered Retirement Savings Plan (RRSP) and as part of its ongoing commitment to improving financial literacy, BMO Financial Group will be providing daily retirement tips during the month of February from BMO Retirement Institute Head Tina Di Vito's new book 52 Ways To Wreck Your Retirement…And How To Rescue It.

Tip Number 37:

Take Advantage of tax gifts such as the Tax Free Savings Account

When the Tax Free Savings Account (TFSA) was introduced in 2009, it changed the way Canadians approached savings and investing. While tax-efficient vehicles such as RRSPs or registered pension plans allow Canadians to defer or postpone tax on investments earned, payments out of these accounts are fully taxable as ordinary income. With a TFSA, withdrawals are completely tax free, regardless of whether they are drawn from cash or returns on different investment vehicles held within it. TFSAs provide a big tax saving opportunity that Canadians should use by doing the following:

  • Take advantage now: Open a TFSA and maximize your available contribution. If this is the first year you're getting a TFSA, you can invest up to $20,000 and contribute the $5,000 maximum each year thereafter. For those with children over 18, encouraging them to open and contribute early could mean they may never pay income tax on any investment income they earn.
  • Double-up: Open a TFSA for a spouse or common-law partner to double-up on tax-free savings.
  • Continue to take advantage during retirement: Continue to use your TFSA to your advantage well after you retire to help minimize tax on investment income, maximize OAS entitlement, provide flexibility to pay for unexpected costs without increasing your taxable income or to preserve the tax-free status of any inheritance you have received.

Tip Number 38:

If you own U.S. property, account for estate taxes as part of your succession plan

While there is no estate tax in Canada, many countries impose estate tax on succession duties, including our neighbour south of the border. Canadians who own U.S. property may have to pay U.S. estate tax at the time of death. This applies to real property, such as vacation homes, furniture or vehicles, and stocks or options to acquire stocks issued by a U.S. corporation. Without proper planning ahead of time, this substantial tax could significantly hamper your succession plan.

To minimize U.S. estate taxes, consider the following:

  • Review your net worth with your financial advisor to determine your exposure to U.S. estate tax.
  • Look for opportunities to invest in U.S. securities through Canadian mutual funds.
  • Speak to a financial expert to determine whether it is appropriate for you to hold U.S. investments in a Canadian holding company.
  • If your current U.S. vacation or secondary property isn't being used, sell it and move furniture and other related belongings to Canada.

For more information on retirement: www.bmo.com/retirement.

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