The Federal Government has given Canadians a special Christmas gift this year. Starting January 2009 all Canadian residents, age 18 and older, are eligible to open a Tax Free Savings Account (TFSA). The account allows a maximum contribution of $5,000 per year to be saved and sheltered from tax.
Although there are similarities to the Registered Retirement Savings Plan (RRSP) the TFSA differs in many respects. RRSPs are specifically designed as a long-term retirement savings vehicle. RRSPs should not be used for short- to mid-term expenses due to the loss of contribution room and full taxation of withdrawals, whereas the TFSA can be withdrawn at any time without restriction or tax consequences and used for any purpose.
Both RRSPs and the TFSA offer tax advantages with distinct differences. Contributions to a RRSP are tax deductible and reduce your income for tax purposes. In contrast, your TFSA contributions are not tax deductible. Both accounts will grow tax-free.
Withdrawals from your RRSP are added to your income and taxed at current income tax rates. However, your TFSA withdrawals are not subject to tax. The capital and growth of a TFSA are withdrawn tax-free.
The amount you withdraw can be put back into your TFSA without affecting your future contribution room. If you withdraw $5,000 in 2009, then your contribution limit for 2010 will be $10,000. The only restriction is that you cannot re-contribute in the year that you make your withdrawal. You must wait until the following year. Another important note is that neither income earned nor withdrawal of capital from a TFSA will affect your eligibility for federal income-tested benefits and credits such as the Guaranteed Income Supplement, the Canada Child Tax Benefit the GST credit or Old Age Security benefits.
You do not lose your TFSA contribution room if you do not contribute up to the limit in any given year. Your unused contribution room is carried forward to the next year and indefinitely. So if you contribute $3,000 in 2009 then your contribution limit is $7,000 in 2010.
The TFSA is anticipated to be a great new tax-sheltered account to help Canadians achieve their personal goals. With this program the government is encouraging Canadians to save rather than use debt – whether for a car, a vacation, home renovations, or a small business start-up. Talk to your financial advisor about the best strategies and options for you utilize this gift in 2009 and beyond.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.
The Government doesn’t hand out too many gifts, especially during this time of year. Thank you for helping spread the word about such an important financial vehicle for Canadians.