By Lachman Balani
TORONTO: On Jan 2, 2009, a new tax saving vehicle was introduced by the government called the Tax Free Savings account (TFSA).
This name is really a misnomer since it suggests that money can only go into a savings account for this purpose. However, this relatively new Tax-Free Savings Account is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.
Besides savings accounts which give negligible returns, one can invest into GICs, mutual funds, bonds, stocks, segregated funds and other investment vehicles.
The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
Here are a few salient features:
- Contributions into a TFSA account can only be made in Canadian dollars. No foreign currency contributions are allowed.
- Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA from 2009.
- The $5,000 annual contribution limit will be indexed to inflation in $500 increments. In 2013, it is being increased to $5,500, so the total cumulative limit, including past contributions, is $25,500
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Unused TFSA contribution room is carried forward and accumulates into future years.
- If a person has contribution room, but no funds to contribute, they may contribute funds given to them by their spouse or common-law partner, with no attribution of income to the spouse
- Full amount of withdrawals can be put back into the TFSA in future years(not in the year of withdrawal) starting a year after which the withdrawal is made
- Choose from a wide range of investments options such as mutual funds, segregated funds, Guaranteed Investment Certificates (GICs), stocks, bonds and cash.
- Contributions are not tax-deductible. That is only after-tax dollars are invested into a TFSA.
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
- TFSA assets can generally be transferred to a spouse or common-law partner upon death, without affecting the contribution room of the survivor.
Here is an example of how a TFSA is more beneficial than a usual non-registered account. Let us say that Julian and Asha both wish to put away $250 monthly for 20 years. Let us assume both are in the 31.15% tax bracket. Julian opts for the TFSA route and Asha for the non-registered route. Let us also assume that both invest in vehicles that give a respectable 6% return. At the end of 20 years Asha will have $92,555 and Julian $116,088!
As we can see Julian is ahead by $23,532 or 25.4%, a significant amount.
For more information and to decide which investment is suitable for you, please contact your financial advisor