Nancy Woods, adviser with RBCDeborah Baic/The Globe and Mail
Dear Nancy Woods,
I am 63 and my wife is 64. We have cash of $25,000 in our savings account. Presently, my wife does not have a TFSA. Would it be a good idea to put the money into TFSA account for her, and then take out an annuity through a financial institution that pays a better rate of income so that the income would not be taxable? Is this possible to set up an annuity with the money put into the TFSA? Is this a good idea to save on tax?
My wife gets $560 early pension she took and I receive the $980 disability pension, so our income is low.
I am just recently reading about annuities and have not made any decision. I would like to know as to what the monthly payout would be on $25,000 if it is put in now. The monthly payout is not required until 65. Does the payout return get better if the amount is increased?
Signed Nazir
Dear Nazir,
You can contribute up to $20,000 to a TFSA in your wife's name. An additional $5,000 can be added after Jan. 1, 2013. I do not suggest purchasing an annuity and hold it in a TFSA. Any income or growth that occurs in a TFSA is not taxable, no matter what type of investment. Since the income from an annuity is only partially taxable, it does not make sense to hold it inside a TFSA.
The income from an annuity varies from issuer to issuer and the yield that determines the payout is influenced by the amount invested into that annuity. You would receive a marginally higher yield for a larger amount invested. What an annuity does do is provide a regular steady income based on various criteria such as age, term, etc. If you want it to continue after the holder's death to a heir, you will pay extra for the death benefit.
The income is treated as having a taxable portion and a part that is a return on your own capital. The proportion of what's fully taxable declines as time goes forward. So, as the maturity date nears, you are getting more of your own money back and there is little to no tax liability.
Instead, for your TFSA consider investing in a good dividend paying stock that has growth potential. You will be able to withdraw all of that income and growth tax free whenever you choose.
If you need specific payment amounts for an annuity, you will need to see a licensed insurance broker.
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Nancy Woods, CIM, FCSI is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To register your interest for an upcoming seminar, "What are the Questions Your Advisor is NOT Asking You?" visit her website nancywoods.com. To ask her a question, send an e-mail to asknancy@rbc.com.