New Tax-Free Savings Accounts
Understand How This New Opportunity Works to Maximize Your Savings
Oct 27, 2008
The Tax-Free Savings Account, or TFSA, is a new investment vehicle available for Canadians over the age of 18 to accumulate $5,000 of savings "room" for each year throughout their lifetime.
Like an RRSP (Registered Retirement Savings Plan), the TFSA is not a particular type of investment, but a container into which different investments can be placed.
What makes the TFSA different from other investing "containers," such as regular bank accounts, is that the funds in the account are allowed to accumulate tax-free.
However, all contributions to the account are made with after-tax dollars - that is, unlike with RRSPs, you do not deduct from your taxable income any contributions you make to a TFSA.
The Government of Canada says the main difference between an RRSP and a TFSA is that "an RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life."
Now that you know what a TFSA is, how can benefit most from this new tax-sheltering opportunity?
New Opportunities for More Pre-Retirees
The TFSA is a great savings option for people who do not accumulate RRSP contribution room (people who have little or no "earned income" for RRSP contribution purposes). This includes people with no employment income, people with pension income, those with investment income, or people who are in receipt of employment insurance benefits.
Instead of saving funds in a regular savings account, put funds in a TFSA so they can grow tax-free.
Use the TFSA to Offset Pension Contribution Limits
If you have an employer pension, you may have little or no contribution room for RRSPs (due to your "pension adjustment," which reduces your RRSP contribution room based on the amounts you and your employer have already contributed to your pension). Or, if you have already contributed the maximum to RRSPs and want to save more on a tax-assisted basis, the TFSA is a good choice.
The TFSA is a particularly good location for investments which generate interest income, which is otherwise taxable at the owner's marginal tax rate.
New Opportunities for People Over 71
If you have reached the age of 71 and don't require the money in your RRSP, but are now facing required minimum withdrawals from a Registered Retirement Income Fund (RRIF), you can place the withdrawn funds in a TFSA where they can generate tax-sheltered income. This strategy will allow your tax-paid funds to grow again with no income tax payable on the growth.
This article provides only a brief overview of what a Tax-Free Savings Account is, and who can benefit most. Future articles will provide more information about TFSAs, including estate planning considerations, the treatment of TFSAs in the event of marriage breakdown, and more.
In the meantime, for more information about TFSAs, see this link from the 2008 federal Budget, which provides more detail about the rationale for the introduction of these accounts, and illustrations of how they will work for Canadians.
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