The Long-term power of the TFSA, Yet to be fully tapped. 

by Joanne Carmichael

What is a TFSA?

In the 2008 Budget, Minister Jim Flaherty announced the creation of this new savings vehicle. While the TFSA is similar to an RRSP there are some notable differences. As with a RRSP, the account is intended to help Canadians save money and plan for future expenses. The contributions you make to the TFSA are made with after-tax dollars but withdrawals are tax-free. So whether saving for a new car or a new house, tax-free savings may help you get there.

Available to Canadians 18 and older, the TFSA will allow you to invest up to $5,000 annually, and carry forward any unused contribution room from year to year. There will be no lifetime contribution limit.

For savvy investors who realize significant capital gains in these accounts, the best thing about the TFSA is that there is no tax on investment income, including capital gains! How good is that?! This is the main difference between the TFSA and a RRSP account.

  1. Enjoy Tax free growth: You pay no tax on the interest earned in your TFSA
  2. Pay no tax on withdrawals: Withdrawals from Your TFSA are completely tax free
  3. You’re not locked in: You can take your money out whenever you need it
  4. Re-contribute your withdrawals: Your contribution room is restored the year after you make a withdrawal
  5. Your contribution room: You can contribute up to $52,000 if you’ve never contributed before (the program started in 2009)
  6. Great for young adults 18 & over: to save for a vacation, a car, a new house or a wedding
  7. Great for middle-aged adults: to save for an emergency fund, a family vacation or supplement a child’s education
  8. Great for seniors: To supplement income in retirement, save for a vehicle or replace RRSP contributions, which are not allowed past age 71
  9. Great for low income earners: If you withdraw from your TFSA, your eligibility for income-tested benefits will not be unaffected. Everyone has the same contribution room, regardless of income level
  10. Great for high income earners: For those that have maximized their RRSP contributions but still want to save more for retirement

Contributions to a TFSA are not deductible for income tax purposes. However, any amount contributed as well as any income generated in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.

An individual can only contribute up to their TFSA contribution room. Unused TFSA contribution room can be carried forward to later years. The total amount of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year.

Joanne Carmichael is the owner of Carmichael Insurance in the Greater Ottawa Region.  To learn more about the TFSA or other investment vehicle please contact Joanne Carmichael at: joanne_carmichael@cooperators.ca  or 613-723-0747.

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