In the Budget of 2008, the Tax Free Savings Account was introduced and took effect Jan 1, 2009. The TFSA will allow Canadian resident individuals to earn investment income, including interest, dividends, and capital gains, on a tax-free basis. Contributions to the TFSA will not be deductible, but the income in the account will not be subject to tax, either while in the account or upon withdrawal. Everyone over 18 has a beginning contribution level of $5000/yr for 2009. This is set to be increased $500/yr for inflation. It is a government tracked savings account that grows any way you want it too, without tax consequences.
Starting January 1/09, you can put money into a high interest savings account, mutual funds, stocks, etc. grow it, get interest, makes gains. All of the different agencies will have different growth vehicles for this money, such as banks, investment firms and stock brokers. CONTRIBUTIONS ARE NOT TAX DEDUCTIBLE LIKE AN RRSP, but, when you take this money out it will not be taxed.
Furthermore, unlike an RRSP, there is no time limit at which the TFSA must be wound up or converted into another investment vehicle. Thus, the TFSA can be used to fund pre-retirement years or post-retirement years, and there are no limits on either withdrawals or the use of the withdrawn funds.
Upon death, the value of the TFSA is not included in income (unlike an RRSP or RRIF), although any income that accrues after death will be subject to tax. To retain the tax-free status of the account, it may pass to the deceased’s spouse or common-law partner, or the assets of the account can be transferred to a TFSA of the spouse or common-law partner.
One very nice feature, any balance WILL qualify as an asset and may be used as collateral for a loan. Also, this money, grown and withdrawn, will not affect government benefits such as Child Tax Credit, GST tax credit, guaranteed income supplement for seniors, or EI benefits.
For instance, if you have money in an ING bank account, it grows and accumulates interest and you get a slip to claim the interest as income on your taxes. Also, if you trade stocks outside your RRSP, when you sell them, if you made any gains, you pay tax on half of them at your current tax bracket.
This account is set up so that anything you make is yours.
This is a REGISTERED account, which means it will be tracked…you will see your limits and activities in this account on your tax assessment, like you see your RRSP contribution room after you file.
Any withdrawals you make, will give you back that room to contribute. Any room you do not use, will carry forward every year, the way RRSP room does. So if you only put in $2000 in 2009, in 2010, you will have $3000 in carry forward room, plus the $5000 from 2010.
Why would you use this?
For example, when you buy a house, instead of pulling out RRSP’s for a down payment and having to repay or claim 1/15 of that amount every year on your taxes, this is your money, and you don’t pay tax on the withdrawal.
Another idea, if it is used as a vehicle for retirement savings, you can make your RRSP savings last longer by taking less, which means take less taxable income, and subsidize yourself with the savings and growth you made in them. No tax consequences.
Put it this way, if you and your spouse put away the $5000/yr, which works out to a direct payment from your bank account of $417/mo for 2009, for 10 years, you would have minimum $100,000 saved. Ten years isn’t that long really, and yes, you could pay down your mtg, or make those lump payments every year, go on a sweet trip every year without worrying about the saving, or use it to live on when times are tough, start a business so you can work part time in retirement or you could buy a treehouse in Costa Rica..lol.
Anyways, talk to a financial guru, I have two I use, why put all my treehouses in one basket!
Laurie Tregaskis of Quiet Wealth, is a financial planner who can work out a personal plan for you and your family to invest and grow that $5k/yr based on where you are financially now and where you want to be..never too early to make a plan! ltreg@telus.net or call her at 403-290-0940.
Darren Harrold works with Blackmont Capital and can set up a portfolio for you, to trade in any stock in any world market, as well funds, REIT’s and too many other options to mention, to grow that $5K/yr. dharrold@blackmont.com or call him at 403-260-6839.
So start to save, roll your coins and put your lottery winnings in here. Now you can spend that ‘Rainy Day” on the beach, in a new car, new neighborhood, or your favorite high end store. Enjoy.