What is a TFSA and why is everyone talking about it?
The new Tax Free Savings Account (TFSA) were introduced in the 2008 Federal Budget effective January 1, 2009 to help us save and invest for our future. Canadians who are 18 years of age or older may contribute up to $5000 per year annually to a TFSA. TFSAs are great because the earnings are tax-free. In Canada, only your principal residence and your TFSA are true tax free investments.
Here are the highlights:
- Your TFSA contribution can go to a wide array of savings or investments such as savings account, GICs, Mutual Funds etc.
- The unused contribution room can be carried forward. So, if you can’t make the full $5000 contribution one year, you can catch up in a subsequent year.
- Withdrawals are tax free and the earnings too.
- Unlike RRSPs, If you make a withdrawal from your TFSA one year, it creates new room. You can therefore, put the money withdrawn back in the plan anytime in a subsequent year.
TFSA or RRSP? Which is best?
It depends on your tax rate and your needs. RRSPs will also produce a tax refund, not just tax-free earnings. Most will therefore get the biggest bang for their buck with an RRSP.
RRSPs are best suited for Long-Term Retirement savings. TFSA are best suited for either short-term, mid-term or long-term savings.
The strategy would typically be to max out your RRSP first and use the TFSA for your emergency fund, travel fund. However, the best wealth builder strategy, would be to use the TFSA for long-term investing also. The tax-free capital appreciation of the annual $5000 TFSA contribution will be dramatic over the long-term.
Here is the Odette twist! Max out your RRSP and invest the resulting tax refund each April in your TFSA. You will be on the fast road to financial independence!!
Contact us now to discuss which is best for you this year, TFSA or RRSP or both!