Mikestrathdee’s Blog

Tax Free Savings Accounts worth a look
January 21, 2011, 10:07 pm
Filed under: Investing

Tax Free Savings Accounts worth a look –  published in July 2010 Christian Week Ontario

Tax Free Savings Accounts (TFSAs) are the best savings and planning break Canadians have been given since the Registered Retirement Savings Plan (RRSP) was created in the late 1950s. For many lower income folks, it may well be a better way to save for retirement than RRSPs.

Almost one in three Canadians have put money into a TFSA since the new tax sheltered savings vehicle was introduced in 2009. But nearly as many people have no idea how a TFSA works, or why they might consider opening a TFSA.


Who can open a TFSA? Any Canadian resident 18 years of age or older who has a valid Social Insurance (SIN) number will earn TFSA contribution room every year.

How much money can I put into a TFSA?

The current contribution limit is $5,000 per year. That amount is indexed to inflation and will rise over time, rounded to the nearest $500. Unused contribution room can be carried forward to a future year. So if Jane Doe put $2,000 into a TFSA in 2009, she can contribute up to $8,000 (the regular $5,000 plus the $3,000 she didn’t contribute in 2009) in 2010.

Why would I put money in a TFSA?

-While you do not get a tax deduction for contributions, you do not have to declare TFSA earnings as income, nor is the money taxed when it is withdrawn.

-Young people saving for a home purchase or for education may in some circumstances want to use a TFSA instead of an RRSP. There is no requirement to repay funds from a TFSA.

-TFSAs are a good choice to build an emergency fund, or saving for a larger purchase such as replacing a vehicle.

– TFSAs can be used as collateral for a loan.

-A TFSA can be used for income splitting within a family. The higher income spouse can give the lower income spouse money to put in a TFSA.

-TFSAs don’t affect eligibility for the federal Old Age Security (OAS), Guaranteed Income Supplement (GIS) or other government benefits.

-Unlike RRSPs, which must eventually be converted to a RIF (or annuity) and withdrawn, a TFSA doesn’t expire. For people with income less than $36,000, a TFSA is a better choice for retirement savings than an RRSP.

-Money withdrawn from a TFSA can be recontributed later, which is not the case with an RRSP.

– TFSAs can be useful estate planning tools.  A TFSA can be passed on, tax-free, outside of an estate, to a surviving spouse, or to charity, if the owner of the plan completes a beneficiary designation form.  If you donate a TFSA to charity, your estate will receive a charitable receipt for the value of the gift.

What can I invest in a TFSA?

Cash, GICs, stocks, mutual funds, bonds, real estate investment trusts (REITS) and a wide range of other financial instruments can be invested in TFSAs.


What should I watch for?

Check the fine print before opening an account. Some organizations charge higher fees than others for opening or maintaining a TFSA account, or for withdrawals from your account.


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