Earlier this year, the Federal Government announced its plan to introduce a Tax Free Savings Account (TFSA) for Canadians, starting in 2009. A TFSA is a flexible registered savings plan that will improve savings and assist nearly all Canadians with their different savings needs throughout their lifetime.
Top 10 Things to Know about the TFSA
- All Canadian residents can open a Tax-Free Savings Account if they’re 18 years of age or older and have filed a tax return.
- The Tax-Free Savings Account will let you invest while not being taxed on the interest earned or investment earnings.
- You’ll be able to deposit cash, GIC’s and mutual funds… and the interest earned is tax-free.
- Unlike an RSP, your contribution to a Tax-Free Savings Account will not be deducted from your income on your tax return, but the interest you earn will not be taxed – so you get to keep what you earn.
- You can contribute a maximum of $5,000 a year.
- If you take money out of your Tax-Free Savings Account, you don’t lose the contribution room – you get it back in the following year. This is important to remember, because if you take it out you will have to wait until the 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 no limit to how much contribution room can be carried forward.
- You can hold more than one Tax-Free Savings Accounts with a number of financial institutions but the total of the contributions must be within your total contribution limit in that year. Holding more than one of these accounts may very well cause confusion in keeping track of contributions so one account is recommended.
- Money you take out of your Tax-Free Savings Account will not affect federal income-tested benefits and credits, so you’re not penalized for saving.
- Each year, the government will determine your remaining available Tax-Free Savings Account contribution limit.
Who is eligible?
Similar to a Registered Retirement Savings Plan (RRSP), every Canadian over the age of 18 will build contribution room. In the case of a TFSA, contribution room of $5,000 (inflation-adjusted annually) will automatically accumulate each year. Any unused contribution room will be carried forward indefinitely to future years. However unlike an RRSP, any amount withdrawn from the TFSA will be added to the individual’s contribution room, so contribution room is never lost but may be re-contributed in a future year. With a TFSA, Canadians have an effective way to access savings in case of unexpected circumstances, and these savings may be replenished in the future. For example, Jane is 25 years old and contributes $4,000 in 2009 to a TFSA and withdraws $1,000 from her plan in 2010. Jane’s contribution room in 2010 will be $7,000 ($1,000 carried forward from 2009 + $5,000 contribution room for 2010 + $1,000 from the 2010 withdrawal).
The key element of a TFSA is that while contributions are not tax deductible, any investment earnings (interest, dividends, capital gains) and withdrawals from the plan are exempt from taxation. Therefore, investments will compound and not be held back by tax.
What can you invest in?
Qualified investments are generally the same as those for RRSPs, which include, among other investments, mutual fund trusts and classes of shares of a mutual fund corporation. Professional advice will be critical in helping Canadians use the TFSA to its best advantage.
Who is an ideal TFSA candidate?
The TFSA has very broad application, benefiting income earners at all levels. Whether saving for a dream vacation, a down payment for a home, children’s education or retirement, the tax-exempt status on investment income and withdrawals will help achieve any financial goal much sooner. Seniors will be able to save and still collect Old Age security. Individuals just starting a career can use the TFSA and build RRSP contribution room to use in later years when they when they earn more. Young couples can save for the education of their children; affluent individuals can set aside funds as part of their estate plans. There are numerous variations, so you could sum up the target market simply: Canadians 18 years and older. This is definitely the time to be working with a Certified Financial Planner because it is getting more complicated to prioritize where savings should go…RRSP, TFSA, RESP, In Trust for kids, mortgage, emergency fund etc. A Financial Planner can help navigate this with you.
It’s hard to see the downside. The benefits of the TFSA create new opportunities and flexibility in financial planning for Canadians. In fact, I believe these accounts will change the way our children save for their retirement and we can benefit greatly as well.
For more information, check out the Government’s Tax-Free Savings Account information page online at www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html.
Kristine Douglas, CFP is a mother of two daughters aged 3 and 6. As a Certified Financial Planner and Financial Advisor with IPC Investment Corporation, she coaches and advises her clients on building their wealth and financial security. She has a particular passion for teaching parents money skills which can be passed on to their kids. Kristine grew up in a family that was very open about money and money management so it was second nature for her to build a business of providing advice and counsel to clients. Kristine has provided TV interviews and talk shows on CBC’s The National, Newsnet, and iChannel. By combining her two passions of life coaching and investment management, Kristine’s unique approach to financial planning has brought much success and peace of mind to her clients’ lives. Visit Kristine at www.wealthyplanning.com.