The Meaford Independent

If you don’t already have a Tax Free Savings Account (TFSA for short), you need to get one. They are a fairly new investment vehicle, unveiled in January 2009, for any Canadian who is 18 years of age or older and who has filed a tax return. TFSA’s make sense for just about everyone, from someone in their early 20’s who is just starting out to someone in their late 70’s or early 80’s who has been retired for 20 years.

Simply put a TFSA is an investment vehicle in some ways very similar to a Registered Retirement Savings Plan (RRSP). You can hold a variety of investments within a TFSA, from riskier investments like stocks and mutual funds to safer investments such as bonds or GICs. The choice is yours. And you can open a TFSA at almost any financial institution – banks, credit unions, brokerages and insurance companies.

But TFSAs are different than RRSPs in a few important respects. One key distinction is that you are never taxed on withdrawals from a TFSA; with an RRSP you are taxed when the money is withdrawn. The money used to fund a TFSA is considered to be contributed “after tax” and is sheltered from the taxman because he has already been paid. Any investment earnings within the account are also exempt from tax. This can make a significant difference in the growth in your investment over many years.

Another key aspect of TFSAs is that because the money that is withdrawn is not considered income, it won’t affect your eligibility for government programs like Old Age Security, Employment Insurance, the GST credit, the Trillium Drug Program, etc.

Another attractive feature of TFSAs is that withdrawals don’t impact future contribution room. If you withdraw money from your TFSA, your allowable contribution room for the next calendar year grows by the same amount as you withdraw this year. Contrast this with withdrawals from an RRSP, where the withdrawals are taxed and the contribution room is lost forever. So in this respect, TFSAs are much more flexible and user-friendly than RRSPs, especially during rocky economic times when people might have to draw upon their savings to make ends meet.

In a future article we will get into a more detailed explanation of different strategies that you might consider using to take advantage of the various attributes of TFSAs, RRSPs and non-registered accounts. For the time being, please make note of these key points with respect to TFSAs:

For more information or for a review of your current financial plan, please contact us.

Barry Altman, PEng, CFP

Barry lives in Meaford, having moved here from Elora almost five years ago. He has over 25 years of experience in private business in a number of fields including finance, sales, design and project management of numerous projects in North America, Europe and South America. Barry is a Professional Engineer and a Certified Financial Planner.

Owen Craig, B.Comm, M.A. Econ.

Owen joined Sun Life in 2008 after spending a dozen years in energy trading. Before leaving Calgary, he was responsible for managing a commodity portfolio worth over $200 million per year on behalf of Alberta consumers. But having grown up in small-town Ontario, he began exploring opportunities to come back this way. When Sun Life approached him about utilizing his skills to develop lifelong financial solutions that work for people, he jumped at the chance to relocate his family to the Georgian triangle.

Note that the information provided in these articles will, by necessity, be general in nature and you should always consult a qualified professional for advice on your specific situation. The opinions expressed are solely those of the authors and do not necessarily reflect those of the company’s we represent. The authors retain all rights to publication.