INTRODUCTION TO THE TFSA: Tax-free Savings Accounts

Tax-free Savings Accounts—How about some good news!

Greetings!

Two of the most “delicious words” in financial planning are “tax-free.” As of January 2, 2009, Canadians will have access to a TFSA [tax-free savings account]. The TFSA is the most exciting tax-saving opportunity for Canadians since the introduction of the RRSP. And, when properly used, there is simply no down-side to the TFSA.

"With its ability to immediately shelter investment-related income from taxation, the TFSA should become an indispensable wealth planning tool for all Canadian investors," says Doug Carroll, Vice President, Tax & Estate Planning at Invesco Trimark.

Allow me to cover the basic features of the TFSA below. With later newsletters, I will get into further details and planning opportunities.

Features of the TFSA—

-The account can be set up for any Canadian resident age 18 or over regardless of his or her income.
-The TFSA contribution is done with after-tax dollars [unlike an RRSP], but look—
-The investment income earned in the TFSA is tax-free and—
-Withdrawals from the TFSA are tax-free.
-You’ll be able to contribute up to $5,000 each year beginning in 2009 [the $5,000 contribution room will be indexed, or increased, each subsequent year].
-You can withdraw money at any time, tax-free, and then choose to “re-pay” your TFSA at any time in the future.*

Furthermore—the TFSA does not “replace” the RRSP or RESP, it supplements it; a spouse or parent can fund the contribution for the TFSA of a spouse or child; unused contribution room for a TFSA is carried forward to future years.

Here are just a few ways that tax-payers can make use of the TFSA—

-Save for a specific purpose like a renovation or recreation property, again with no tax on the investment income.
-Supplement retirement savings. In retirement, this will augment the tax-efficiency of producing retirement income.

See more examples at the very bottom under “Scenarios.”


In brief, what does the TFSA mean for investors? Beginning in 2009, any non-registered investments should be made in a TFSA within the limits allowed. And, once you’ve maximized your RRSP—or if you are in a low tax bracket—the TFSA becomes an efficient way to save additional monies for retirement or a child’s education without having to worry about tax on investment growth. The longer the time horizon for building up your TFSA, the more you will benefit from the tax-free compounding of investment growth. Finally, unlike an RRSP, when you withdraw monies from your TFSA there will be no tax.

I will be offering TFSA accounts in the new year that are free of administration and withdrawal fees. In the meantime, if you have any questions about TFSA accounts, see the supplementary reading provided below and then send me any unanswered questions.

Cheers!

Tom

Next newsletter: the RRSP versus the TFSA

Notes--
*For example, say you contributed to your TFSA and, after several years, it is worth $30,000. You can withdraw any or all of that money tax free and not lose the contribution room. So, if you withdrew $30,000 from your TFSA, you can put the $30,000 back at any time in the future. On top of this, you will receive your additional $5,000 [indexed] contribution room each year.
Supplementary reading—

Click on or enter the following links into the address bar of your browser—

1. Investor Q&A on the TFSA

http://www.advisormailout.com/Advisor/Home/1153/1685/images/TFSA%20Investor%20Q&A%20Final.pdf

2. Scenarios--how to take advantage of the TFSA

http://www.advisormailout.com/Advisor/Home/1153/1685/images/Scenarios.pdf