Tax-Free Savings Accounts
Sunday January 4, 2009
Registered Tax-Free Savings Accounts (TFSAs), which reduce the taxes Canadians have to pay on investment income, are now available. Canadians can put $5000 a year into these accounts. Income earned by one of these accounts is tax free, and unused contribution room can be carried forward to future years. Withdrawals from the account can be made at any time, for any purpose, and will not be taxed or affect eligibility for federal income-tested benefits and credits. Withdrawals will also create contribution room for future savings.
The Finance Department estimates that contributing $200 a month to a TFSA for 20 years would result in about $11,000 more in savings than if the investment was made in a regular savings account. The initiative isn't much help to those who have trouble saving anything at all, but should give a boost to young people, middle income Canadians and seniors.
Photo: Gettty Images / Photodisc / Keith Brofsky
More on Banking and Taxes in Canada
RRSPs in Canada
Canadian Banks
Canadian Income Tax Basics
Comments
Most articles about the TFSA are completely missing the benefits of this new plan. If you trade stocks, you can trade within a TFSA and your capital gains are TAX FREE, as well as your dividends. This is the real beauty of the TFSA. You can get a Tax Free Trading account at Questrade, which is where I just opened one.
This article is good because it gives readers a quantifiable amount of savings with the $11,000 over 20 years. As Ian commented there are a lot of other options that are available to make the TFSA very important for all Canadians.
TFSA is exactly like an American ROTH-IRA. Except that the money you put in is after-tax money. But the income is indeed tax free. So, yes, if you put in $5000 a year, and made x dollars, the x dollars is tax free.
This does not mean everyone should rush to American just because they did it first.
The IRA (or RRSP in Canada), is extremely limited. It is not a percentage of your income nor is it related in any way to a pension plan or social security. One step forward, two steps back!