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Tax Free Savings Accounts
Tax free savings accounts were first made available in 2009 and allow Canadians a way to invest money and have the growth grow tax free. Future withdrawals are also tax free. Unused contribution room can also be carried forward to future years, you need to be at least 18 years old and have a valid social insurance number.
Many people do not understand that a TFSA is not in itself an ‘account’, just like an RRSP is not in itself an investment. Both of these are ways to register an investment which can be many types including a daily savings account, GIC’s, mutual funds, or stocks, to name a few.
If you register an investment as a RRSP you can deduct the money you invest from your income that year but the money withdrawn is taxable.
If you register an investment as a TFSA you cannot deduct that contribution but the money withdrawn is tax free.
The primary purpose of a TFSA is to provide a tax-sheltered way to save money, which can be used for any medium or long-term purpose. For example, you may want to lay away funds for unexpected emergencies or save up for a large purchase.
In comparison RRSP’s are primarily intended to help Canadians save for retirement, but it’s important to understand that TFSAs and RRSPs can effectively complement each other in a comprehensive investment portfolio. In fact, you may benefit greatly from contributing the annual maximum to each in order to meet different savings goals.
Investment earnings within a TFSA and any withdrawals won’t affect other government programs such as GIS, old age security, or Canada child tax benefits, so it still may be advantageous to use this as a retirement program.
Many studies have been done as whether to register your investment as a TFSA or an RRSP, and the answer cannot be given until many questions are answered, such as your tax bracket today versus your expected tax bracket when you retire, as well as the type of investment you’re willing to hold. It’s best to talk to an advisor first to determine your unique situation.
Need more information?
You can visit the Government of Canada’s website at www.tfsa.gc.ca to learn more about TFSAs. To understand how TFSAs can benefit your unique situation and financial strategy, speak with an advisor.
For a thorough evaluation of your insurance needs, please speak with our advisor.