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TFSA; More for You, Less for the Tax Man

If you’re like most Canadians you’re probably wondering what this new TFSA is all about, either that or you’ve never even heard of the TFSA and you’re thinking to yourself, “another acronym to figure out? Tortured From Second-rate Acronyms?” So I thought I would help you out by breaking it down into easy to understand lingo and giving you a few pointers on how you can use it to your advantage.

The TFSA, or Tax Free Savings Account, is the government’s new incentive to help Canadians sock away some extra cash for a rainy day. It’s quite similar to contributing to an RRSP, only simpler because the contribution room isn’t based on your income. Beginning January 1, 2009, every Canadian aged 18 or over, will be eligible to contribute $5000 per year regardless of income. The money will then grow tax free, just like it would in a registered investment such as an RRSP or RESP.

What a lot of people don’t realize, is just how much they’re forking over to the government in taxes from investment income every year, and hence, just how advantageous this new TFSA could be. Let’s say for example you max out your yearly contribution of $5000. Even if it’s just in a GIC or High interest bank account making 4% interest, assuming a 35% marginal tax rate, you’re saving around $70 per year. Not a huge amount, but I wouldn’t leave it lying in the parking lot. If your investment was in a mutual fund where you generally expect higher returns, typically in the 6-10% range, your savings could be as much as $120 per year. But what if you max it out every year for 5 years? In the 4% interest rate example you would have $28,165 at the end of the 5th year; your interest income would be around $1,100, and the tax you would have paid, had it not been in a TFSA, just under $400. That I definitely wouldn’t leave in the parking lot.

So how can you fit the TFSA into your financial plan? Well don’t run out and cancel your RRSP contributions, in upcoming articles I’ll be comparing the TFSA to RRSPs and RESPs, but your best bet is to use the TFSA to compliment your other investments. The main difference between RRSPs and the TFSA is liquidity. The TFSA is easily accessible without having to pay taxes or penalties* on withdrawals, so this makes it ideal for an emergency fund. Experts recommend keeping 3-6 months worth of family net income in a liquid savings account in case the car breaks down, or the roof starts leaking etc. For the average Canadian family that’s about $15,000-$30,000. So now you can start pumping some money into your TFSA and get a bit of a tax break.

 If you have more questions about the TFSA, I strongly suggest you check out the Q&A, on the CRA’s website, http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html, you may just pick up some VUI (Very Useful Information).

TTYL,

Ryan

*Some companies may charge a deferred sales charge fee, be sure to ask your advisor when setting up the account.


Special thanks to Ryan for submitting his article to Kids Kingston. You can contact Ryan at:
Freedom 55 Financial
613-544-9600 ext. 251
www.ryanwood.biz