Post by Terry Wright in December 18, 2008
By now most people have heard of the government’s introduction of the new Tax Free Savings Account (TFSA) effective January 1st, 2009. The new TFSA will allow investors the ability to contribute $5000 per year that can then continue to grow tax free. Unlike the RRSP, you do not receive a tax deduction for contributions, however, one of the most appealing features of a TFSA is that when you take money out – it comes out tax free! That’s right – in addition to growing tax free inside the plan, it can also be withdrawn tax free!
Another feature of the TFSA is that any money withdrawn from the account is added to the contribution room for future years. If no withdrawals are done then the basic $5000 per year accumulates.
For example, let’s say in the first year you contribute $5000 in January 2009 and by December 2009 your investment has grown to $10,000 (I know – highly unlikely in this market but bear with me). If you cash in your investment and withdraw your $10,000 – you are now able to add that $10,000 to your contribution room for future years. Continuing with our example, if in January 2010, you decide to again contribute to your TFSA, you would be able to contribute a total of $15,000 ($10,000 for the 2009 withdrawal and $5000 for 2010).
All tax payers 18 years or older are able to open a TFSA and will begin to accumulate $5000 of TFSA contribution room per year regardless of their income level. This amount will also be indexed to inflation, rounded to the nearest $500.
The new TFSA is so dynamic that it is beneficial to almost EVERYONE!
If you are in the fortunate position of being able to maximize your RRSP contributions every year, then the TFSA provides an additional way to get tax-free growth on your savings. And let’s face it, in Canada’s high tax system, the more tax shelters we are able to use the better! Alternatively, if you are in a low tax bracket and don’t get the maximum benefit of your RRSP contribution deductions, then a TFSA would be a viable way to ensure you still get tax-free growth on your savings. Plus you don’t have to worry about paying tax on withdrawals in the future.
The new TFSA can also help with income splitting since you are able to gift $5000 to your spouse so that he/she can contribute and have that money grow tax free. This can effectively get $10,000 per year in the plan since spousal attribution rules don’t apply.
Seniors that have RIF income every year but no need to spend that money typically invest that income in an un-registered investment account. Unfortunately, the returns then generated on that money are taxable. However, if $5000 of that un-registered money is contributed to a TFSA, it is then able to grow tax free, thus helping reduce the tax burden on the already overly taxed senior.
The types of investments that you are able to hold in a TFSA are very similar to what can be held in an RRSP – almost anything. Cash, GIC’s, bonds, stocks and mutual funds are all eligible under the government’s rules. If you are a long term investor with a high tolerance for volatility, now might be a great time to consider some of the tremendous values the stock market is presenting. Or if you are someone with a short time horizon and a low tolerance for risk, a high interest savings account might be a better option. Regardless, the returns are sheltered from tax.
Tax Free Savings Accounts are a great way to reduce the amount of money sent to the government and should be used by anyone who saves. If you haven’t already started the process of getting a TFSA opened, then call me right away and I can help you get the ball rolling. Contributions aren’t able to be done until January 1st, 2009 but we can at least get the account opened. In most cases, there aren’t any fees for the account so there is little deterring savers from getting started.
I truly believe Tax Free Savings Accounts are going to improve the saving process and I would be more than happy to meet for a complimentary consultation to review how the TFSA is best suited for you.
I have prepared this commentary to give you my thoughts on various financial aspects and considerations. This commentary reflects my opinions alone, and may not reflect the views of Raymond James Ltd. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of Raymond James Ltd.
If you would like to discuss this or any other financial matters, feel free to contact me.
Terry Wright, CIM – Portfolio Manager & Financial Advisor