TFSA – No Need To Rush

December 10th, 2008 Posted in Investing|Personal Finance

Tax Free Savings Account (TFSA) – No Need To Rush

TFSAFree Personal Finance Magazine Offer

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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 You will not be able to regain your contribution room back by taking out money Amount withdrawn will create equal contribution room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.

Some hand-picked posts you may want to read:

Your Free RESP eBook Is Ready
No One Cares About Your Money
40 Ways To Save Money On Textbooks
Updated – Is it possible to hold an annual fee credit card and still pay no annual fee?
30 Free Canadian Financial Tools and Calculators
13 Free Canadian Personal Finance eBooks
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  1. 5 Responses to “TFSA – No Need To Rush”

  2. By Joe Wood on Dec 29, 2008

    I heard once that RRSPs can be used for real estate investing. Is that true? I’m 21 so I haven’t looked into this yet (I know, I should start, the earlier the better, etc).

    Joe Wood
    http://www.thecrustylandlord.com

  3. By A.D. on Dec 29, 2008

    Most probably you heard of holding a mortgage inside an RRSP. This will only work if your RRSP has enough cash (or equities) to hold your mortgage.
    Let’s look at a simple example: If you have a $200,000 mortgage, and your RRSP value is $200,000 or more, you will be able to use this money to pay off your mortgage and start making payments to your RRSP (rather than your bank)
    Or –
    If your home is paid off, you can borrow $200,000 against your home, and invest this money in a non-registered income generating
    portfolio, and take out same amount from your RRSP to pay off the borrowed money. Theoretically … this should make you money in the long run. This is a very complex issue and I will not go into details.
    I will suggest you to seek legal and accounting advice of qualified professionals before making any decisions. Cheers.

  4. By Bienvenido Isla on May 1, 2009

    Please crystallize the penalty imposition to a TFSA issuer that pays higher interest (premium rate)than market to TFSA depositors.

    thnak you.

  5. By mike on Sep 1, 2009

    I need clarification:

    “Unused room can be carried forward indefinitely.”

    I opened a TFSA and I put $25 in it. Yes, i am a student so I don’t have much to use.

    Next year, can I contribue $9975 ? since i have unsed of $4975 from this year.

    Say I put all my tuition money in the TFSA for a week, and use up the $5000 limit for this year, does that give me 80+ years to put that 5K back in later?

    My main goal, is to make sure in 10 years when I have $50,000 in extra cash, I can put it all away tax free then. is that even how it works? [I know my income will be much higher in the future].

  6. By A.D. on Sep 1, 2009

    1st Answer: Yes.
    2nd Answer: If you are putting in your $5000 for that year even for a day, you will be done with your contribution room for that year.

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