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Q. Could you please explain how the Tax Free Savings Account works and what are the benefits of having one is?
A. The Tax-Free Savings Account (TFSA) was introduced by the Government of Canada to encourage people to save. The benefits of contributing to a TFSA is that all investment earnings on your TFSA grow tax sheltered. Tax-free money, no loop-holes, no claw backs. A TFSA could quite possibly grow to become your tax-free nest egg. And what’s more, it’s accessible when you need it and it is a perfect companion investment to team up with your RRSP portfolio.
TFSAs demonstrate advantages for all. For those with low taxable income, the TFSA may be their best option,(contributing to an RRSP when their marginal income tax rate is higher; for those who have maxed out their RRSPs, the TFSA becomes an additional tax-savings investment vehicle, and for seniors it can provide a tax shelter for investment income.
How does it work?
If you are 18 years of age or older, you can allocate a maximum of $5,000 to your TFSA in 2009. The maximum allowable allocation will be adjusted to inflation in future years. Qualified investments for a TFSA commonly are, but not exclusively, cash accounts, term deposits, mutual funds, stocks and bonds.
Any unused contribution room carries forward indefinitely, so you can ‘catch up’ when your financial situation allows. Should you find the need, withdrawals can be made anytime and the bonus is, withdrawals of contributions and their accumulated investment earnings are tax-free.
Anytime you are given the opportunity to save tax dollars on your hard earned income, it’s definitely worth the time it takes to explore your options.
For more information, there are information sheets available on our website at http://www.synergycu.ca/ under Investing > Tax-Free Savings Account. You will also find a TFSA Calculator here as well, which illustrates how your savings can add up and how much you can save.
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