Tax-Free Savings Account (TFSA)
Introduced in the 2008 federal budget and effective for January 1, 2009, the TFSA is an extremely flexible savings vehicle that allows the owner to make contributions (up to an annual maximum amount), to carry forward unused contribution room and to withdraw funds at any time without losing the right to re-contribute an equal amount in a later year. The powerful incentive of the TFSA is that the investment income or growth is not taxed and withdrawals are tax-free.
A TFSA may hold a wide range of qualified investments such as stocks, bonds and other popular portfolios including mutual funds, segregated funds and GICs.
There is no restriction on how withdrawals can be used. Withdrawals may be made for personal reasons, investment, education or any other purpose. The amount withdrawn will be reinstated as contribution room in the next calendar year. For example, if you made a $5,000 contribution in each of 2009 and 2010 and the account had grown to $12,000 and you withdrew that amount in 2010, your contribution room for 2011 would be the regular $5,000 (assuming there is no indexing) plus the $12,000 you had withdrawn in the previous year for a total of $17,000.
It is expected that the CRA will report each taxpayer’s contribution room on their Notice of Assessment along with registered retirement savings plan (RRSP) contribution information.
An individual must be at least 18 years of age to open a TFSA. The maximum contribution amount in 2009 is $5,000. In future years, the maximum amount will be indexed based on the rate of inflation.
Over-contributions will attract a penalty tax of one per cent per month until the excess is withdrawn.
The reasons for setting up a TFSA are many, ranging from the need for savings to the income tax advantages. Without a doubt, a TFSA will become a common component of every financial plan, whether it is used to accumulate funds in the medium term or to maximize the tax planning opportunity.
The TFSA is something every taxpayer should consider.
Tax-Free Savings Account (TFSA)
Introduced in the 2008 federal budget and effective for January 1, 2009, the TFSA is an extremely flexible savings vehicle that allows the owner to make contributions (up to an annual maximum amount), to carry forward unused contribution room and to withdraw funds at any time without losing the right to re-contribute an equal amount in a later year. The powerful incentive of the TFSA is that the investment income or growth is not taxed and withdrawals are tax-free.
A TFSA may hold a wide range of qualified investments such as stocks, bonds and other popular portfolios including mutual funds, segregated funds and GICs.
There is no restriction on how withdrawals can be used. Withdrawals may be made for personal reasons, investment, education or any other purpose. The amount withdrawn will be reinstated as contribution room in the next calendar year. For example, if you made a $5,000 contribution in each of 2009 and 2010 and the account had grown to $12,000 and you withdrew that amount in 2010, your contribution room for 2011 would be the regular $5,000 (assuming there is no indexing) plus the $12,000 you had withdrawn in the previous year for a total of $17,000.
It is expected that the CRA will report each taxpayer’s contribution room on their Notice of Assessment along with registered retirement savings plan (RRSP) contribution information.
An individual must be at least 18 years of age to open a TFSA. The maximum contribution amount in 2009 is $5,000. In future years, the maximum amount will be indexed based on the rate of inflation.
Over-contributions will attract a penalty tax of one per cent per month until the excess is withdrawn.
The reasons for setting up a TFSA are many, ranging from the need for savings to the income tax advantages. Without a doubt, a TFSA will become a common component of every financial plan, whether it is used to accumulate funds in the medium term or to maximize the tax planning opportunity.
The TFSA is something every taxpayer should consider.