Tax Free Savings Account (TFSA)

The following is an article I wrote, that was published in the Hamilton Mountain News on March 11, 2010.

TFSA-Tax Free Savings Account: another investment option

At this time of year, there is always a panicked flurry of financial activity for individuals. This is in no small part due to the looming Income Tax deadline (April 30 for individuals) combined with the RRSP Contribution deadline of March 1. While developing your financial plans this year, do not overlook the TFSA.

The TFSA was introduced in the 2008 Federal Budget. As of January 1, 2009 any Canadian resident (excluding trusts) over 18 years of age and having a valid social insurance number is eligible to open a TFSA and could contribute upto $5,000 per year. Although contributions do not generate a tax deduction (like the RRSP), the growth of the contributed dollars is tax free! Other benefits of the TFSA are that in future years, the maximum contribution limit will increase (it will be indexed to inflation) and unused contribution room can be carried forward.

What does this mean to you?

First of all, there are numerous investment options available to the TFSA holder. As you may be aware, different investments have different tax implications. By saving money in the TFSA you are free to invest without worrying about tax on interest income, capital gains, dividend income etc. Keep in mind that currently, even the smallest amount of interest earned in your regular bank savings account is taxable.

The fact that unused contribution room can be carried forward means that you never have to worry about losing the contribution room. if you contribute $200 this year, you will have $9,800 ($5,000 - $200 + $5,000) of available contribution room next year and so on. This can truly be advantageous for individuals saving up for a house, a car or someone who comes into a larger sum of money. Also, if planned wisely, the TFSA can be a useful tool for seniors needing to unwind their RRSPs by the age of 71.

Funds can be withdrawn from a TFSA with no tax consequences. Not only is the growth tax-free, withdrawals and income earned in the TFSA, will not affect your Old Age Security (OAS) Benefits, Guaranteed Income Supplement (GIS), Employment Insurance (EI) Benefits, the Canada Child Tax Benefit (CCTB) , the Goods and Services Tax Credit (GSTC), the Working Income Tax Benefit (WITB) or the age amount. Eligible withdrawals are also added back to your contribution room.

Overall, the benefits of the TFSA can be quite significant to the Canadian taxpayer. More information is available through the Canada Revenue Agency website, your financial advisor or your financial institution.

If opening a TFSA account, make sure to get all the details on the costs and specifics associated with the accounts. This may include administrative charges, transaction charges, investment restrictions etc.