Shuttle strategies to boost tax-sheltered plans

Over its 15-year history, the TFSA has progressed from novelty to fixture in our financial landscape. When used as a shuttle, a TFSA’s built-in flexibility can feed into other tax-sheltered plans while also enhancing the TFSA’s own benefits.

Whereas available contribution room for other tax-sheltered plans, such as RRSPs, is exhausted as contributions are made, the TFSA calculation operates in both directions. For a Canadian resident over age 18, annual room has three components:

• the prescribed annual TFSA dollar limit, currently $7,000;
• unused room from previous years; and
• withdrawals made in the immediately preceding year.

The third component presents the opportunity for the TFSA to be used in concert with its tax-sheltered siblings. And, not only might a TFSA help another plan, the benefit of that interaction can also echo back to the TFSA.

Assumptions

Meet 20-something Mick. He’s a serial saver for current needs, and is ready to set aside an additional $100 each week to add to his routine. He intends to use a high-interest savings account (HISA), with the going interest rate in early 2024 at 4%. It’s the beginning of the year, and he hasn’t yet used any of his annual TFSA room.

Understanding there are 52 weeks in a year, we’ll use $5,000 for the annual tally. As well, although his cash flow and the HISA terms are bound to vary, we’ll keep them constant here.

FHSA for a home

Mick needs to start saving for a down payment on a house, for which he wants to use the recently introduced first home savings account (FHSA). Base annual contribution room is $8,000, with a lifetime limit of $40,000. His plan will have him saving about $5,000 a year, using up his lifetime room in eight years.

Alternatively, Mick could open HISAs for both his FHSA and his TFSA. Assuming the same terms for each, weekly deposits could be directed to the TFSA, then, after 50 weeks, in mid-December, the balance could be withdrawn and deposited into the FHSA before year-end.

The average TFSA balance over the year will be $2,500. With 4% interest, the mid-December balance will be about $5,100.

An annual TFSA-out/FHSA-in shuttle of that full amount will allow Mick to max his FHSA in a little less than the eight years. With annual TFSA deposits of $5,000 and withdrawals of $5,100, the net re-contribution credit will be $100 each year, giving Mick $800 more TFSA room over the full duration by using the shuttle option.

If, instead, an even $5,000 is taken out of the TFSA annually, it will again take exactly eight years to fill the FHSA, as if the TFSA had not been involved. However, by using the TFSA as a shuttle, $800 extra TFSA balance will be created, without making any material change to Mick’s investment choices or risk exposure.

RESP for son’s education

Now in his 30s, Mick needs to catch up on contributions to the RESP he set up for his son, Jack. Using carryforward of past unused room, Mick plans to deposit $5,000 for the next seven years or so, to claim the maximum Canada education savings grant (CESG). The CESG matches 20% of annual RESP contributions, which would be $1,000 in our example.

As with the FHSA example above, deposits could go directly into the RESP or be routed through a TFSA. By routing through the TFSA, some of that CESG will be delayed a few months compared with grants awarded on direct RESP contributions. That’s a small price to pay for the additional TFSA balance or contribution room, which will sum up to slightly more than $700 across those planned years using the same HISA terms.

Once Jack is enrolled in a qualifying post-secondary program, personal RESP contributions can be withdrawn tax-free. The withdrawn amount could be routed back to Mick’s TFSA, assuming there is sufficient room. While the continuing income would be tax-sheltered whether left in the RESP or moved to the TFSA, the availability of the re-contribution credit once again favours use of the TFSA.

If Mick wants to take it a step further, some of those refunded contributions could go to the TFSA opened by Jack, who started getting TFSA room at age 18.

RRSP for retirement accumulation

As Mick travels through his 40s, 50s and 60s, his savings efforts will increasingly focus on retirement. The dollars will be larger — from the amounts saved to their accumulation and on to the annual drawdowns — but otherwise the same fundamentals apply. Mick could contribute directly into an RRSP or use a TFSA/RRSP shuttle, bearing in mind that larger amounts mean larger re-contribution credits.

One more effect to consider is the annual tax refund Mick can expect to receive after deducting those non-workplace RRSP contributions when filing his annual tax return. If that too is routed through the TFSA, it will provide an extra lift to the anticipated TFSA re-contribution credit generated each year.

HISA or market investing?

While HISAs may work for shorter-term goals, a diversified investment portfolio is generally more appropriate for RRSP savings. In turn, a parallel TFSA portfolio could be arranged to facilitate the intra-year shuttle. A higher expected (although variable and not guaranteed) return relative to an HISA could be one more boost to the TFSA re-contribution credit.

Mick should consult with his advisor before undertaking this more advanced version of the shuttle concept, to determine which approach best aligns with his knowledge, personal circumstances and risk tolerance.

RRIF for retirement decumulation

Into his 70s, Mick will have migrated his accumulating RRSPs into the decumulating form of a RRIF with mandatory minimum annual withdrawals. By default, he would probably take a fixed weekly or monthly spending withdrawal. Alternatively, he could take a lump sum early in the year and route it into a TFSA (a HISA being most appropriate for this use), still available for spending, while getting one more TFSA-room kicker.