TFSA Tax Free Savings Account

What You Need To Know

The TFSA is Now Available.

All Canadian residents (other than a Trust) can open a Tax Free Savings Account provided they are 18 years of age or older beginning January 2009.

It will let you invest while not being taxed on the investment earnings.

Eligible investments include segregated funds and GIOs. (Guaranteed Investment Options)

The contribution you make to your account will not be deducted from your income on your tax return, but the investment income you earn will not be taxed---so you get to keep what you earn. You can withdraw money from your account at any time and for any purpose without incurring tax.

You can contribute a maximum of $5,000 per year beginning January 1, 2009. The contribution room will be adjusted annually to the nearest $500 subject to inflation.

If you take money out of your account, you don’t lose the contribution room---you get it back the following year. This is important to remember, because if you take the money out you will have to wait until next year before you can put the money back in.

If you don’t make the maximum contribution you don’t lose the contribution room. The unused contribution room gets carried over to the following year. There is currently no limit to how much contribution room can be carried forward.

You will have to file a tax return to determine your contribution limit. Each year the CRA will determine and advise you of your contribution limit for that year on your notice of assessment.

You can hold one or more TFSAs but the total of your annual contributions must be within your total contribution limit in that year.

Money you take out of your account will not affect your eligibility for federal income-tested benefits and credits such as the Child Tax Benefits, Guaranteed Income Supplement (GIS), Old Age Security benefits (OAS), Age credit and Goods and Services Tax credit (GST).

Contributions to a spouse’s Tax Free Savings Account are allowed. TFSA assets can be transferred to a spouse upon death which would continue the tax exempt status of the earnings and not affect the surviving spouse’s contribution room.

This is the most exciting government program since the RRSP, be sure to talk to your financial planner to see where the Tax Free Savings Account will fit into your financial plan.

There are some common myths about the TFSA. Click here ==> to have those Dispelled!

Where best to use a TFSA

• Emergency Funds -- for years financial gurus have recommended that you set up an emergency fund. Covering 3 to 6 months living expenses. Before the the TFSA you had to use a savings account. Any interest earned was taxed a your full Marginal Tax Rate. With a TFSA you avoid undue taxation and should you need to use the emergency fund, you can recontribute the withdrawn monies the following year or when things improve.

• High Risk Investments -- we would like get that little penny stock tip that parlay's into the next RIM. $5,000 could turn into $500,000 and not one dime of tax is owed.

• Collateral for loans -- savings inside a Tax Free Savings Account can be used as collateral for a loan.

• To protect your government benefits -- my personal favorite these accounts protect your government benefits from claw-backs. Many government benefits are income tested to the recipient -- withdrawals from a TFA account are not considered income and the amount inside a TFSA does not enter into the calculation.
• Tax rate planning -- Many Canadians will be surprised to learn they will be in a higher tax bracket in retirement than when they were working and should NOT contribute to an RRSP, but rather a TFSA to reduce this tax liability.

• Retirement Planning -- People who can not contribute to an RRSP (people with no earned income, on disability, who have a large pension adjustment, or are over age 71) can use the Tax Free Savings Account

• Education Planning -- RESPs will continue be the choice for education savings (strictly because of the government grant). RESPs are fraught with restrictions and in the case of University Scholarship Fund extremely putative fees for what they decide is early withdrawal. A TFSA can offer for more flexibility and no having to answer to government or a corporate lackey.

• Income splitting -- You can open and fund a Tax Free Savings Account for anyone you wish. A spouse and any children or grandchildren 18 years of age or older.

• Estate Planning -- A TFSA can be rolled over to a spouse's TFSA to maintain its tax free eligibility upon death. If left to any one else future gains are taxable. Only one province so far --Nova Scotia allows naming a beneficiary. (Tip use Seg funds inside the Tax Free Savings Account and name a beneficiary. That way you bypass the estate process, probate and other fees and delays)

• Emigration Planning -- If you retire outside of Canada you can still maintain a Tax Free Savings Account and it's tax-free status on any withdrawals. You will no longer be allowed to make contributions without a tax penalty--as a non-resident of Canada. Note: The new country you live in may tax the growth.

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