TFSA - No Need To Rush
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TFSA or RRSP
First Published: December 10, 2008 ADawnJournal.com
Recently, an ADJ reader sent the following email:
Hi Dawn,
Been reading your blog for some time now and getting more and more interested in learning to handle my own finance.
I would like to know more details about the new Tax Free savings account and your take on this new thing and how we can use it best.
Thanks for your time!
Ms. ADJ Reader (Withholding name for privacy)
Today’s article is specially written for Ms. ADJ Reader and many other ADJ readers who are waiting eagerly to read ADJ article on TFSA.
What Is a Tax Free Savings Account?
TFSA is an account type where you can make contributions, grow your money (means you can earn interest or income), and take out money without paying any taxes.
Doesn’t It Sound Like an RRSP (Registered Retired Savings Plan)?
Kind of. However there are some major differences. Let’s look them one by one.
RRSP
TFSA
When you put money in an RRSP, you get tax slips to reduce your taxable income
contributions in a TFSA do not reduce your taxable income
When you take out money from an RRSP, you pay taxes on withdrawals and your withdrawal will be added to your income (it simply means you taxable income will be higher)
TFSA withdrawals are tax free
RRSP account has age limit (must be terminated by 71);
TFSA has no age limit
Once you put in money, your contribution room is used up. You will not be able to regain your contribution room back by taking out money
Amount withdrawn will create equal contribution room
Some TFSA Features
· Canadians aged 18 and older can save up to $5000 a year.
· Annual contribution limit will be indexed and will increase gradually.
· Contributions will not be tax deductible but income and gains will not be taxed.
· No taxes to pay when you withdraw money out of TFSA.
· Income earned or withdrawals will not affect eligibility for Federal benefits such as Old Age Security, Canada Child Tax Credit, Guaranteed Income Supplement.
· No taxes to pay when you withdraw money out of TFSA.
· Unused room can be carried forward indefinitely.
· TFSA account can hold same products like RRSP, such as GICs, stocks, mutual funds, and many more.
· Upon death, your TFSA can be transferred to your spouse without tax implications.
· Excess contributions will incur a monthly penalty tax of 1% – just like an RRSP.
TFSA Ideas
You have to be creative here. There are so many ways you can use a TFSA account. Here are some I can think of off the top of my head:
· If you don’t have room in your RRSP account, use TFSA.
· If you don’t have room in your RESP account, use TFSA.
· Use TFSA for short-term savings.
· Use TFSA for long-term savings.
· Use TFSA to keep your emergency funds.
My Take
You should use TFSA to its full limits; however, I don’t see there is any need to rush. You will see bank ads and some personal finance blogs making it sound like you should jump into it right now – otherwise, you will miss the boat. This is simply not not the case. TFSA is not going anywhere and there is no need to rush. Take your time to draft your investment planning and strategies and then make full use of TFSA.
