Advisors Report

As of 2009, you have a new tax-sheltered option for saving money, thanks to the new Tax-Free Savings Account (TFSA). The TFSA allows you to save or invest your money without paying tax on income, dividends or capital gains earned inside the account. You can also withdraw funds tax-free at any time. That’s a great incentive to save money!!!

It is important to know: The TFSA is not an investment! It is not like a Canada Savings Bond, sold by the government. Rather, it is more like an RRSP (Registered Retirement Savings Plan), or a savings account. Think of it as a vehicle to hold investments. The difference being that you DON’T pay taxes on any income earned with in it!

The TFSA is suitable for everyone, whether you are just starting your savings plan or you are an experienced investor. And it couldn’t be easier to set one up.

Any Canadian resident who is 18 years of age or older and has filed a tax return can establish a TFSA. You can open one at your favourite financial institution, threw your financial advisor, or even on line. Initially, your annual contribution room is $5,000 per calendar year. You do not have to contribute the maximum every year, as the unused contribution room can be carried forward to future years. This number will grow by $5,000 annually, and will be indexed to keep pace with inflation in $500 increments.

You can withdraw funds from your TFSA at any time, for any reason, with no penalties. It could be for a new car, to renovate your kitchen or to take that dream vacation you always wanted. You could even use it as security for a loan. Withdrawals are not subject to any taxes, so any growth experienced over the year is yours TAX FREE.

The amount withdrawn during the year will be added to your contribution room the following year, so you don’t lose contribution room by withdrawing – you get it back in the following calendar year. Most investments that can be held in an RRSP will also be eligible for your TFSA, including GICs, mutual funds, segregated funds, stocks and bonds. This is a huge opportunity to earn investment income and not pay taxes.

Unlike an RRSP, you won’t be able to deduct your TFSA contributions on your income tax return. But don’t think of this as an RRSP which is a tax deferred savings account that still taxes you when you withdraw. Think of this as an opportunity to grow your savings tax free, and with draw them TAX FREE.

Money withdrawn out of your TFSA doesn’t affect federal income-tested benefits and credits like Old Age Security, the Goods and Services Tax Credit and the Canada Child Tax Benefit. You can also transfer your TFSA assets to your spouse or common-law partner upon death without any impact on the survivor’s existing contribution room. It also offers income-splitting opportunities.

There’s a lot to like about the Tax-Free Savings Account. Maybe too much to cover in one article, but I can tell you this: The introduction of the TFSA has taken the importance of financial planning up another notch. For some, it may be wiser to use the TFSA in your investment plan. For others, the RRSP may make more sense. And for some, a combination of the two. Now is the time to review your situation to see how to best plan ahead.

So whether it’s a short term goal like a new car or a dream vacation, or a long term goal like a new home, the tax free savings account may be the perfect strategy to get you there faster. If you have any questions or comments, please feel free to contact me and I would be happy to discuss the benefits of the TFSA and how it can fit into your financial plan.

Adam Myers

Independent Planning Group

202-223 Colonnade Road South

Ottawa Ontario, K2E 7K3

Phone: (613) 224-5511 x 108

Email: adam@pfip.ca