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Benefits Of A Tax Free Savings Account (TFSA)

Published on: January 26th, 2015

Are you a saver? Setting money aside for a home reno or that big trip you always wanted to take? Maybe you do not have any RSP contribution room left and need another place to save for your retirement. Whatever you are saving for, you should explore the benefits of using a Tax-Free Savings Account (TFSA).

What is a TFSA?

A TFSA is a registered account that Canadian residents aged 18 and over can contribute to up to the annual limit, which is currently $5500 for 2014. Your contribution room can be carried forward if you do not use it and withdrawals can be put back in future years.

If you make a contribution to your TFSA, don’t expect a tax deduction for it like you get with your RSP contributions. But don’t worry, there are great tax savings to be had with TFSAs as well.

Tax Benefits

Investment income earned inside your TFSA is tax-free. Interest, dividends and capital gains that you had to report to CRA for your non-registered savings and investments, are now sheltered from the tax man. The added benefit is that it remains tax-free even when you take it out. Unlike an RRSP, you are not taxed on any withdrawals from a TFSA, making it a very flexible planning tool.

TFSA vs RSPs

If you are still confused about whether a TFSA or an RSP is the right tool for saving, hopefully this chart will help.

TFSA

RRSP

For virtually all savings and investment objectives

Primarily for retirement savings

Contributions are made with after-tax income

Contributions are tax deductible

Contribution room is added back when withdrawals are made

Contribution room is used up when withdrawals are made

Withdrawals are tax free

Withdrawals are added to income and taxed at your current rate

No requirement to withdraw at any age

Must be converted to a RRIF by age 71; withdrawals after that age are mandated according to a schedule based on age

Contributions can be made any time for those age 18 and older

Contributions cease at age 71

TFSAs can hold the same investments as other registered accounts, including:

  • Mutual Funds
  • Segregated Funds
  • Stocks
  • Bonds
  • GICs

Still wondering if the TFSA is for you? Talk to a professional advisor today, as they can help you find the right tool to fit your savings goals.

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