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TFSAs can be used for everything from new car to 1st house

The most popular alternative to an RRSP is probably the tax-free savings account, or TFSA, which the government introduced in 2009 and which many financial advisers say is the better option for middle- and low-income Canadians who want to put aside some of their income.

Of the people holding TFSAs, 44 per cent had made their maximum annual contribution of $5,000 for 2012, according to a poll released by Bank of Montreal (BMO) in November.

In 2013, the annual contribution limit has increased for the first time to $5,500. Most Canadians say they plan to contribute the maximum allowable amount within the next five years.


TFSAs popular but not used effectivelyTax Free Savings Accounts

Despite the lack of understanding that surrounds TFSAs, the numbers show that they are still attractive to income-earners. At the end of their first year of existence, TFSAs held a combined value of $17.4 billion in assets across five million accounts. By June 2012, the total asset amount had ballooned to almost $74 billion in 10 million accounts, according to Investor Economics.

Comparison of key differences between TFSA and Registered Retirement Savings Plans (RRSP)




Features TFSAs RRSPs
  • Funds can be withdrawn tax-free at anytime for any purpose from the year you turn 18 (with a SIN).
  • The amount you withdraw in one year can be put back in a future year, over and above your contribution limit for that year.
  • You can withdraw from your RRSP at any time but will be taxed on the amount you take out, which is why most financial advisers suggest you wait until retirement to do so, when your overall tax hit is generally lower than when you’re working because you have less income.
  • If you do make a withdrawal before your RRSP matures, you will lose that contribution room forever.
  • None for withdrawing funds.
  • If you contribute more than the limit for a given year, you incur a penalty of one per cent for each month you are over the limit.
  • Some investments inside a TFSA have their own penalties for early termination, called back-end loads, ranging from one to six per cent.
  • Any withdrawal from an RRSP prior to your retirement year is subject to a withholding tax at the time of withdrawal of 10-30 per cent depending on the amount withdrawn. The withdrawn amount is added to your income, and you may end up having to pay more tax on it when you do your return for the year. One way to avoid the penalty is to use the money to fund a first home or your education through the Home Buyers’ or Lifelong Learning plans.
  • CRA allows up to $2,000 in excess contributions beyond your annual limit as long as you were 19 or older during the year for which you are filing a return; beyond that, you may have to pay a penalty of one per cent per month.
Contribution Limits
  • Up to $5,500 annually (starting in 2013) — plus any unused portion from previous years. The annual contribution limit is indexed to inflation — but changes only when the indexed amount can be rounded up to the nearest $500.
  • Your personal contribution limit is based on earned income, pension adjustments and how much you contributed to RRSPs in previous years — up to a maximum contribution limit that changes each year. For the 2012 tax year, the maximum is $22,970.
  • You can keep contributing until Dec. 31 of the year you turn 71, and after that, you can contribute to a spouse’s RRSP until the end of the year he or she turns 71.
Deduction Limits
  • Money deposited in TFSAs is not tax deductible and neither is the interest on money borrowed to invest in TFSAs.
  • The maximum amount of RRSPs you can deduct from your taxes in a given year is equal to your contribution limit. You can choose to deduct less and use the unused portion to increase your contribution room the following year beyond the annual maximum.
Tax Benefits
  • Any interest, investment income, dividends and capital gains earned in a TFSA are not subject to tax — even if withdrawn.
  • Income earned is not taxed until it is withdrawn.
Investment Possibilities
  • High-interest savings account, mutual funds, guaranteed investment certificates, listed securities and other types of qualified investment products.
  • High-interest savings account, mutual funds, guaranteed investment certificates, listed securities and other types of qualified investment products.


More Flexibility

Tax Benefits: One of the key features of investing in a TFSA is the possibility of earning Interest and Capital Gains without being subject to tax.

One of the key reasons behind the popularity of TFSAs is the flexibility they offer. Money deposited in a TFSA can be withdrawn tax-free at any time.

People who invest money inside a TFSA don’t get an immediate tax break the way they do with an RRSP contribution, but investments inside a TFSA grow tax-free.

TFSAs are also good for people who are looking for alternative places to shelter money, says Judith Cane, a money coach based in Ottawa.

The accounts can also prove useful to those who suddenly inherit money and need somewhere to put it, while it earns interest tax free.

Saving for a new home

With the TFSA, young people and home buyers now have  the TFSA option.

By contrast, withdrawals to the TFSA can be repaid to the plan at any time, following the year of withdrawal.

Discussion Questions:

1. The TFSA was introduced in 2009, how many of you are familiar with the rules of TFSAs?

2. Now that you have read this article, are you more interested in Saving?

3. Is the option of using your TFSA to make investments tax free and incentive to invest?

For more detail information ,read the full Article written by Shenaz Kermalli, click on CBC News

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