As you are aware, we at Polson Bourbonniere Financial are big fans of the new (2009) Tax Free Savings Account (TFSA). The main reason is a simple one – eliminating all income tax on any growth means significantly higher accumulation down the road. For those over 65, lower taxable investment income can help reduce potential exposure to the OAS ‘Clawback’. There are other provisions of the TFSA that make it ideal for short and medium term saving as well.

There is a long term ‘TFSA’ that has been around for some time. It is permanent life insurance. It can also keep the tax department away from your retirement savings. How? For most people, there is a portion of their portfolio that will not be spent on retirement – a portion that will be passed on at death to a spouse or other beneficiary. Let’s call this amount the ‘Legacy Amount’. In a regular investment account, tax is paid on realized gains or income every year, reducing the ultimate value of the Legacy Amount. A life insurance policy provides a tax free death benefit, for which a policy holder pays an annual premium. If this annual premium comes from the Legacy Amount, we are sheltering it from further taxation.

If we take a male aged 60, depositing $10,000 per year into a typical taxable bond or GIC portfolio earning 4%, in a 40% marginal tax bracket, he would accumulate about $250,000 after 20 years. The same $10,000 into a life insurance policy would provide a tax free death benefit of over $344,000, at current (non-guaranteed) rates. That’s an increase of 38% in the Legacy Amount.

If tax reduction is an important investment and estate planning goal, be sure to discuss this ‘Other TFSA’ with your Polson Bourbonniere Financial investment advisor.