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Clearing things up on Tax Free Savings Accounts (TFSA's)

Clearing things up on Tax Free Savings Accounts (TFSA's)

Most people have heard about TFSA's (Tax Free Savings Accounts) which the federal government launched in 2009 to encourage Canadians to save for the future.  Many people started them, and for those who didn't, I am writing this to help clear things up and hopefully answer any questions you may have had.  It in my opinion is one of the best things the government has done to help people save.  There are a couple unique features that makes the TFSA different than many other investment vehicles registered or non-registered.  

First of all money you invest in a TFSA is after tax dollars and it grows tax free!  This means if you for example, invest $100 into a TFSA and it grows to $1000.00, you won't have to pay tax on interest earned. You also don't pay tax when you withdraw it!   Hard to beat that!  But there must be a catch?

Really the only limit is in fact the limit or amount you are allowed to invest.

As I said earlier they were available to Canadian investors beginning in 2009, that year and each year after until 2012 you were allowed to contribute $5000 per year. $20,000 in total.  In 2013 the limit was raised to $5500 per year and 2014 and 2015 limits are the same. Meaning if you have never contributed to a TFSA you have the ability to catch up and can contribute up to $31,500.  After that you may only contribute the annual maximum. (ie. $5,500).

Whether it is lump sum contributions or monthly installments you can and should start saving Now!  Many people originally started them through their local bank.  Unfortunately these were typically invested in low rate GIC's no matter if your investment risk tolerance was advanced.  I would recommend speaking to a Financial Advisor so you can build a portfolio in which you feel comfortable investing. You can start your TFSA at a bank, credit union, through a broker or advisor at an insurance company.

Many people are thinking and I have heard this many times over the years, why not just buy RRSPs.  Well they are both good and serve a different purpose.   RRSP's are for long term retirement savings. They defer tax to retirement when ideally you have lower income and can benefit from the tax savings when you are receiving income from your RRSP.  The TFSA is flexible and can be used for shorter term savings or as a strategic part of your long term retirement plan. Again I encourage speaking to an advisor and your accountant as to which product or products are best for you.

You must be 18 years of age or older, a resident of Canada and have a valid Canadian social insurance number to qualify for TFSA’s.

For a complete list of the rules on TFSA's  and more information check out www.tfsa.gc.ca or www.cra-arc.gc.ca and search TFSA.

My advice, look at a TFSA as part of your short and long term savings plan!

Written by Tab Pollock a financial advisor with Neil and Associates (2006) Inc.