TFSA - What Is It And Should You Have One?

TFSA (Tax Free Savings Accounts) are a relatively new idea for Canadians. The mechanics are simple you can contribute $5,000 a year (every year since 2009) to the TFSA, the income earned on your contributions accumulates tax free and when you take it out of the plan you do not pay any income tax on the withdrawal. The plan is similar to the RRSP (Registered Retirement Savings Plan) with the big difference that the contributions are not a deduction and therefore any withdrawals from the plan are not taxable. This is an entire change in strategy.

The TFSA is not well named. You are allowed to invest in much more than a savings account. In fact you can put anything in a TFSA that you can put in an RRSP. The types of investments that you should put in a TFSA are those investments that will increase in value. No kidding - the only issue is how to identify these investments! The strategy is to put high growth -high risk - type stocks in the TFSA because you won't pay any tax when you take out all the money you made. Here is an example, imagine you bought $5000 of ABC Ltd and left it in your TFSA for 15 years. Imagine it increased to being worth $30,000. When you take the $30,000 out of your TFSA you will not pay any tax on that $30,000! Does this not seem like a great deal? Contrast that to the RRSP deal where you get a tax deduction for the original $5000 contribution but you have to pay tax on the $30,000 withdrawal.

The TFSA started in 2009. Each year any resident of Canada, 18 years of age and older, may contribute $5000 to a TFSA plan. The contributions are cumulative, which means if you have yet to contribute, you have $15,000 of room as of 2011. If you withdraw any amount from your TFSA, you can re contribute it the next year. This is also different from the RRSP; with the RRSP you do not get any contribution room back when you make a withdrawal.

TFSA contribution room has nothing to do with employment income; everyone gets the $5,000 a year. So this allows people who are not in the work force or business owners who only take dividends, to contribute to a retirement savings vehicle.

There is no March 1 deadline with the TFSA as there is no deduction, so if you decide on TFSA rather than RRSP you can keep on procrastinating.

Debi J. Peverill CA is an accountant with a sense of humour. She has written 11 books for business owners and is in demand as a speaker. Learn more business strategies at http://www.peverill.ca/