Tax Free Savings Account (TFSA)

The Tax Free Savings Account also known as the “TFSA” for short is a new type of registered savings account available to Canadians starting this year in 2009.

Features of a TFSA

• All investment income (dividends / interest) and capital gains are allowed to grow TAX FREE within the account
• All funds may be withdrawn from the account TAX FREE including both your contributions and investment returns
• Each year you are allowed to contribute a specific amount to your TFSA. In the 2009 the maximum contribution is $5000 which will rise with inflation in increments of $500.
• Contribution room is carried forward so if you miss a year, don’t sweat it, you can always make it up in future years
• If you withdraw money from a TFSA you can re-contribute the full amount in future years
• Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
• You can provide funds to your spouse or common-law partner to invest in their own TFSA without penalty
• TFSA assets can be generally transferred to your spouse or common law partner upon death
• Contributions made to a TFSA account are NOT tax deductible.
• If you contribute more than the annual limit you will be taxed 1% per month on the excess contributions

What Investments Are Eligible For A TFSA?

The following are primary assets you can hold within a TFSA.

• Cash
• Guaranteed investment certificates (GICs)
• Government and corporate bonds
• Mutual funds
• Publicly traded securities/stocks

Difference Between A TFSA and an RRSP

An RRSP is a savings vehicle used mostly for retirement purposes, while a TFSA is used for everyday savings. Both are similar in that they offer tax advantages, but they have distinct differences.

RRSP

• Contributions to an RRSP are tax deductible against current income
• Withdrawals from an RRSP are added to your income and taxed at your marginal tax rate

TFSA

• Contributions to a TFSA are not tax deductible against current income
• Withdrawals from a TFSA are tax free including an capital gains and investment income (dividends + interest)

TSFA Calculator

Give the TSFA Calculator a try to figure out much you can save with a TFSA over time.

TFSA Calculator (Excel 2003) | TFSA Calculator (Excel 2007)

Tags: Tax Free Saving Account, TFSA