The Federal Government's new Tax-Free Savings Account (TFSA) tax-saving option for Canadians comes into effect in 2009. The TFSA can be a good addition to your retirement plan, particularly when you make it a part of your overall financial plan that includes your most important tax-saving, income-building investment - your Registered Retirement Savings Plan.
Here's a quick comparison of the TFSA and an RRSP:
. RRSP contributions provide an immediate tax benefit because they are directly deductible from income. Contributions to a TFSA cannot be claimed as a tax deduction.
. Withdrawals from a TFSA are not taxed when withdrawn. RRSP withdrawals are added to income for tax purposes.
. The contribution maximum for a TFSA is $5,000 per annum (you can have more than one Account as long as you do not exceed the $5,000 limit in total). The RRSP contribution maximum is determined by your earned income. (In 2009, the maximum RRSP contribution limit is $21,000.)
. Generally, the same investments are 'eligible' for either a TFSA or RRSP - mutual funds, publicly-traded securities, government bonds, and GICs.
. TFSA funds can be withdrawn at any time for any purpose. RRSP funds are typically not withdrawn until after retirement.
. Withdrawn amounts can be put back into a TFSA without reducing contribution room.
. Unused TFSA and RRSP contribution room can be carried forward to future years.
. Withdrawals and income earned in a TFSA will not affect eligibility for federal income-tested benefits and credits including, the Age Credit, Old Age Security benefits or Guaranteed Income Supplement.
. There is no time limit at which a TFSA must be wound up or converted to a different investment. RRSPs must be wound up or converted by the end of the year when a person reaches age 71.
A TFSA can be an especially good option when your RRSP is maximized. Because the income is not taxed, a TFSA will likely deliver better returns over the long term than other non-registered investments - but the tax-sheltered, tax-saving, compound growth features of an RRSP still make it a much better choice for long term growth.
This column, written and published by Investors Group Financial Services Inc. (in Quebec - a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances.
- News Canada