Q. A younger couple is curious about Tax Free Savings Accounts (TFSA). They’re wondering about how this account really works, and if it is really worthwhile as an investment tool.
A. When the Tax Free Savings Account came into effect in January 2009, it was heralded as an excellent new financial opportunity for Canadians. Under the current rules, every individual 18 years of age and older with a valid Social Insurance Number (SIN) can deposit a maximum of $5,000 per year into their TFSA. The couple in this case could each have a TFSA, for a total of $10,000.
As the name implies, the wealth you generate within your TFSA – such as the interest earned on your savings, or an increase in the value of stocks* – is not considered taxable income. In other words, you do not pay any additional income tax on any money you withdraw from your account. (Please note, though, that your contributions into your account are not tax-deductible – they are “after-tax dollars”.)
The TFSA is also attractive because of its flexibility, starting with the types of investments you can hold in your TFSA. This includes variable interest savings accounts, term deposits, guaranteed investment certificates, mutual funds*, and publicly traded securities* and bonds*. Furthermore, if you do not reach your contribution limit, you can carry it forward to the following year, just as you can carry forward your unused contribution room with an RRSP.
Generally, any time the government is willing to give you a tax break, take it! The TFSA is no exception, but it has its place. For the young couple in question, the best thing to do is to first max out their RRSP contributions, and then turn their attention to a TFSA. However, if they want a tax benefit but also feel they want to be able to access their cash quickly and easily, a TFSA remains very attractive. For that reason, it is hard to imagine why anyone with a savings account would not want to change all or part of it into a TFSA.
TFSAs and RRSPs are excellent tools for investing, but like any tool they need to be used in the right way, under the right circumstances. That is where a Financial Planner can be of real value, because they can put your entire financial situation into proper perspective. They will work with you on an individual basis; that’s important, because everyone’s situation is different.
*Mutual funds are offered through Credential Asset Management Inc. and mutual funds and other securities are offered through Credential Securities Inc. Unless otherwise stated, cash balances, mutual funds and other securities are not covered by the Canada Deposit Guarantee Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Credential Securities Inc. is a Member-CIPF.
State your case (click here). When you come to Synergy Credit Union, we’ll find the answers. For more information, including links to convenient calculators and other tools, go to www.synergycu.ca –or visit your nearest branch of Synergy Credit Union today!
