As of January 1, 2009, Canadians can put their money in a new savings vehicle called a Tax-Free Savings Account (TFSA). Here’s how TFSAs work.
“TFSAs can help you achieve a variety of short and long-term goals,” says Chartered Accountant Suzanne Schultz, a financial planner with RBC Dominion Securities in Hamilton. “Their key benefit is that neither the investment earnings in the account nor the withdrawals are taxable.”
In this respect, TFSAs are different from non-registered investment accounts, where you have to pay tax on the investment earnings. They also differ from Registered Retirement Savings Plans (RRSPs), where you pay tax on withdrawals. Unlike RRSP contributions, you cannot claim tax deductions for contributions to TFSAs.
Any person living in Canada who has reached the age of majority (age 18 in Ontario) and who has a social insurance number can open a TFSA. “You can also give funds to your spouse or common-law partner, or to any adult person, to contribute to a TFSA,” says Chartered Accountant Gordon Jessup, a partner with Fuller Landau LLP in Toronto.
The types of investments you can put into your TFSA depend on where you set it up. “Different financial institutions offer different investment choices,” says Schultz. “You could put Guaranteed Investment Certificates (GICs), publicly traded stocks, bonds and mutual funds into your TFSA. Any investment that would qualify for your RRSP also qualifies for your TFSA.”
You can contribute up to $5,000 a year to your TFSA. “The $5,000 contribution limit will be indexed to inflation in $500 increments in future years,” says Jessup. “If, in any given year, you contribute less than $5,000 or the indexed limit for that year, you can carry the contribution room forward to future years. As well, unlike RRSPs, if you make a withdrawal from your TFSA, the amount you withdraw is added to your contribution room, allowing you to make short-term withdrawals without penalty.”
TFSAs are a good idea because they are flexible and you can use them in a variety of ways to enhance your financial plan. “The name says it all,” says Schultz. “A TFSA can accumulate investment income and capital gains on a tax-free basis.”
TFSAs can also serve different purposes at different points during your lifetime. “Young families can use them to supplement existing savings in a Registered Education Savings Plan (RESP) for their children,” says Schultz. “Those saving for retirement can use them to bump up their retirement savings.”
“A TFSA is a useful tool, but it should be part of your existing financial plan,” says Jessup. “A CA can help you review your financial situation and decide how to best incorporate the TFSA into your plan.”Brought to you by The Institute of Chartered Accountants of Ontario.
