Canada Money CA

Starting 2009, Canadians have access to the newest type of savings account, the Tax Free Savings Account, which give investors an opportunity to capitalize on tax free investment benefits. This new account is not widely understood, however, Canadians are excited to learn how it can benefit their financial futures.

One of the primary points to understand about the TFSA is that it is not merely a savings account as you may be familiar with from your local banking institution. A savings account creates an image for many of a low interest, liquid type of cash account. And while you can invest into cash within your TFSA, it presents virtually a limitless list of investment options to consider investing into, including securities, debt instruments and even real estate investments. An investor can invest in virtually whatever investments they wish inside of their TFSA accounts.

Most Canadians are familiar with the traditional RRSP investment account, commonly used for retirement purposes. Unlike the RRSP account, contributions made into the TFSA account are made on an after tax basis. Therefore, when the account owner withdrawals their funds, they are not subject to income taxes as they would if they had invested into an RRSP account. This tax free benefit is one of the largest draws for investors to consider utilizing the TFSA for their financial purposes.

Another key difference between the TFSA and traditional investment accounts is that funds can be withdrawn from the TFSA for virtually any financial purpose. For example, a TFSA owner could utilize those funds to purchase a home, a car, to send their children to college or as a retirement savings vehicle. This flexibility to withdrawal funds without a financial penalty creates flexibility that is attractive to most investors.

One last key difference between this new TFSA account and other retirement accounts is that money can be re-contributed into the account at a later date. For example, if an individual contributes their maximum allowable funds into the TFSA account each year and makes a withdrawal 5 years after they open the account, they can re-contribute the withdrawn amount into their TFSA so that they can take advantage of the tax free benefit again within their future. So, the ability to use this investment vehicle for shorter term financial goals as well as for long term financial goals is appealing to most investors.

While no investment vehicle is a perfect match for every investor, there are several key advantages to the TFSA that should be taken into consideration when creating both a long term and a short term financial strategy. Once the decision has been made to utilize the TFSA for financial goals, the specific investments must be selected for the account to hold. Personal risk tolerance, total investable assets, asset allocation, investment time frame and investment purpose should be taken into consideration when making these individual investment selections.

Canadians need to save for many different purposes over their lifetimes. Reducing taxes on savings can help. That’s why the Government has introduced a new Tax-Free Savings Account (TFSA). It’s likely the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP).

The TFSA will allow Canadians to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. TFSA savings can be used to purchase a new car, renovate a house, start a small business or take a family vacation. With the TFSA Canadians from all income levels and all walks of life can benefit.

For more information visit: http://taxfreesavingsaccountinfo.com/

Tax Free Savings Account FAQ:

Question: Tax Free Savings Account TFSA?
I’ve been reading a lot of articles and blogs about the the TFSA. Almost every article I’ve read implies using the TFSA for holding cash investments and GIC’s getting marginal at best returns. I would think the only real advantage in this account doesn’t come into affect until a large balance is attained, so wouldn’t it be advantageous to use it primarily as a vehicle to hold your moderate to high risk investments, maximizing your returns and tax savings?

I have yet to hear of anyone suggest this and I want to know if I’m off my rocker. Please tell me what you think?

Answer: Interest bearing investments that pay only interest and foreign dividends are taxed at 100% so it would advantageous to hold as much of these investments as possible in the TFSA. If you still have room then the Canadian dividends and capital gains could also be earned tax free but these investments already receive special reduced tax treatment.

Question: Interest on Tax-Free Savings Accounts- PC Financial?
I am probably not comprehending the interest calculation on my TFSA correctly. I opened my account in January at 2.55%. For the first month of the account, I deposited $500. When I go to check my interest accrued, it was listed at $0.75. Is there something I am missing? 500 x 0.0255 is $12.75. Even with averaging out the daily account balances, it seems as though I should have earned more interest than $0.75.

Is there something I am missing, or should I be on the phone with my bank?

Answer: That 2.55% is per annum- per YEAR. Not per month. So you’d have to divide the 2.55% by 12 first, to get .21%. Now multiply that by 500 to get 1.05. The difference between that and the .75 has to do with how often the interest is compounded.

Question: Would appreciate feedback about tax-free savings account (TFSA)?
I am considering options for savings and have learned more about the TFSA but would like to hear directly from those who have opened this type of account. How are you finding it? What do you like about it, and dislike, if anything?

Answer: To me it’s like any other savings account, you throw some money in there and wait a couple years. Nothing really to like or dislike really, depending on the ones you go with as they differ from place to place.

Question: It is worth it to split my money into two savings accounts?
Okay so the direct savings account and the tax free savings account both have the same interest rate but the limit on the tax free savings accounts is $5000 per year. which means I’m going to have to split my savings into two accounts. Should I just put the whole things into a direct savings account instead of splitting it into two accounts?

Answer: No, do two accounts so you can take advantage of the tax break. That makes the most sense to me.

Question: Differences between Tax-Free Savings Account and RRSP?

Answer: RRSP provides an immediate tax savings, since all amounts (below your limit) are deducted from income. All amounts (original principal plus any accumulated earnings) are taxable once you withdraw from the RRSP. Earnings accumulate tax free in the interim. The advantage is the immediate tax savings, plus the ability of the earnings to compound over the years.

In the Tax free savings account, you use after tax dollars to contribute. Again, earnings accumulate tax free, but all earnings are taxable once withdrawn. Here the only advantage is the ability of the earnings to compound over the years.

Question: Is the TFSA really tax free?
Don’t you get taxed upfront? I already filed my taxes and there was no mention of tfsa. The interest you earn on a tfsa is tax exempt but that is a pretty small amount. What is with the tax free slogan all the institutions are singing?

Also, what is the “transfer out fee”? And why would I do it? I can just withdraw the money and put it in a different account.

Answer: Do not confuse the TFSA with the RRSP. TFSA has nothing to do with your personal income tax because it involves after tax dollars. When you contribute money to a TFSA, you are subject to a limit of $5k per year.

The big different between a TFSA and a regular account is the tax exempt status of it. As you say, the money you earn is tax exempt and you don’t have to report on your income tax. If you earned $50 in a regular savings account, the bank would issue you a T5 slip and you would report that interest as income when you do your taxes. Had that $50 been earned from a TFSA, the bank won’t issue you a slip because you don’t have to report it.

The transfer out fee is the bank’s way of getting some money out of you for ditching them. Say you don’t like the bank, or want to take your account to another place, this is the fee they are charging you to transfer it from one place to another. Each place can make up their own fee and claim it is a cost of doing business.

Question: Canadian Tax on interest ?
I recently found out that Canadians are required to pay tax on the interest they accumulate in their savings accounts. Can anyone confirm this?

I only came across this after viewing a CIBC commercial that offered “a tax-free account” and I asked myself “why would I need a tax free account??” I do my tax online through Quicktax and I don’t ever recall any request to enter the amount I made on interest. How would I know how much I made on interest? Am I expected to go through all my banking statements and add up the interest?

Answer: If you made above a certain amount, the bank will send you a form at the end of the year that shows your interest income. And yes, tax on interest is virtually certain, worldwide.

Question: Credit card debt or TFSA?
The govt and banks are pushing these new Tax Free Savings accounts. Should you start to put money in one if you’re still carrying a balance on your credit card?

Answer: Normally I tell my clients to have a good balance between debts and savings. After all, you should always pay yourself first by investing your money.

However, when you carry a credit card debt, which is bad debt, you should concentrate on getting rid of the balance.

It is simple math really. Credit card interest rates can be upward of 30% where even in an Aggressive Mutual Fund under the TFSA you will get maybe 12 – 15% at most. So, it makes more sense to pay off your credit card.

If the debt in question was a mortgage or a line of credit where the interest rate was 4-5%, I would suggest the opposite.

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