What’s so great about the TFSA?

Plenty! I love the TFSA for many reasons. To begin with, it stands for ‘Tax Free Savings Account’. Who couldn’t love something that earns you tax-free income?

It works very differently from an RRSP. RRSP contributions are tax-deductible and provide the owner with deferred income tax until the money is eventually withdrawn. While there is no tax-deductibility for contributions, any income or profit earned inside TFSAs is never taxed – no matter what the investments held inside it. And better still, TFSA withdrawals do not affect any federal benefits or credits a tax-payer may qualify for.

And as you may know, the annual contribution limit on Tax-Free Savings Accounts keeps on increasing every year by $5,500. This means that most Canadian residents have now accumulated a total of $36,500 in TFSA room over the past 6+ years (you must be 18 to contribute). And unlike the RRSP, this contribution room is not ‘used up’ if you withdraw money from the plan. The government actually permits you to replenish it to the cumulative total allowable limit in the next calendar year, a nifty little feature.

TFSAs are a great savings vehicle for your short to medium-term goals. Saving for your next vehicle? Works great. Want to pay for your next vacation with cash? The TFSA is perfect. What about your Emergency Fund? Yep, that too.

Question: What is the best way to put away money into your TFSA?

Answer: Automatically, straight out of your chequing account, on the day you are paid. You won’t miss what you never see. And there’s no feeling like paying for something big with cash.
Another feature about the TFSA is that they are a great income-splitting tool. Most income that is earned by one spouse invested on behalf of the other is taxed in the original tax-payer’s name (called income attribution). With TFSAs, you can gift money between spouses without this concern. The higher income earner can contribute to the lower income earner’s TFSA without worries about income attribution – one of very few income-splitting opportunities around – in addition to spousal RRSPs, Pension Income splitting and the primary residence capital gains exemption.

For the small percentage of Canadians who max out their RRSP room each year (due to company pension contributions, or a great savings habit), the TFSA works well as an additional retirement fund. There is even more flexibility in the TFSA because there is never a minimum withdrawal required (like with a RRIF), and as mentioned, there are never tax implications when making withdrawals. Interestingly, for those currently in a low income tax bracket, the TFSA may work better for your retirement than the RRSP but make sure you talk to a financial professional before making a call on this.

And remember, you can hold as many TFSAs as you want. If you want one for your Emergency Fund, another for your Next Car and another for your Next Vacation, you can set up 3 different ones. They can all be at the same institution, or spread among several institutions. The CRA keeps track of your contributions via your SIN, so be careful not to over-contribute or you will be penalized.

So the next time you are thinking about saving money towards a home down payment, a renovation or a big trip, think about the TFSA. In 2009 it started out as a small tax-saving vehicle but each year its significance has grown – along with its lifetime limit.

To learn more, visit the CRA website at www.tfsa.gc.ca/index.html

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