TFSA (Tax Free Savings Account) Account
The TFSA is a type of registered savings accountthat allows taxpayers ages 18 and over to earn interest, other types of investment income and capital gains tax-free.
A TFSA is best suited for any Canadian resident who is over 18 with a Social Insurance Number and who would like to save including:
Lower income group younger people, who still have no significant tax advantage to contribute to an RRSP, specially individuals who are anticipating significant jump in their income in the near future.
Individuals who have maximized their RRSP contributions and still want to grow their tax investments.
Seniors who have savings and are concerned about their investment earnings impacting federal income-tested benefits or credits (i.e. such as Old Age Security benefits, the Guaranteed Income Supplement, or the federal age credit.)
Seniors of age 71 or more, who are forced to withdraw money from their RRSPs can also use TFSA, if they are still looking to grow their savings tax-free.
With a TFSA, you don’t need to have any income to accumulate the $5,000 per year contribution room |
With an RRSP, you must have income in order to accumulate contribution room |
Withdrawals from a TFSA are tax-free. Any amount withdrawn is then added to your contribution room in the following year, so that you could later re-contribute the amount that you withdrew. |
Withdrawals from an RRSP are taxed in the year of withdrawal (with the exception of the Home Buyer’s Plan (HBP) and Lifelong Learning Plan (LLP) which are not taxed provided they are repaid on schedule). Any amount withdrawn can not be added to your contribution room in the following year. |
Contributions to a TFSA are not tax-deductible on your income tax return. |
Contributions to your RRSP are tax-deductible on your income tax return |
There is no requirement to convert the TFSA to an income payment option (e.g. a RRIFor an annuity) at any age |
An RRSP must be fully withdrawn or be transferred to a RRIF or annuity by the end of the year you turn 71. |
Like an RRSP, unused TFSA contribution room can be carried forward every year, without limit. Any amount withdrawn from a TFSA is added to your contribution room for the following year as well, essentially ensuring that your total potential pool of tax-free savings is never depleted. At death, the entire account can be paid out to your beneficiaries free of tax as well.
TFSA Versus Unregistered Savings
Because capital gains and other investment income earned in a TFSA will not be taxed, a person contributing $200 a month to a TFSA for 20 years will enjoy additional savings of $11,045 compared to saving in an unregistered account.
That's the attraction of this new plan -- grow tax free, withdraw tax free, re-contribute withdrawals, and pay out at death tax free.
