The government brochure announcing the introduction of the TFSA calls it “the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)”. Unlike the usual hyperbole, the government is probably understating the importance that TFSAs are likely to play in the savings plans of all Canadians.
The TFSA is the mirror image of RRSPs - contributions are made with after-tax dollars but withdrawals are tax-free. But TFSAs have an interesting twist because any withdrawal from the account creates an equal amount of contribution room. This would allow us to save for an automobile or a dream vacation in a tax efficient manner and replace the savings in the future. How great is that?
Another great feature of the TFSA is that earnings within the account and withdrawals do not affect income-tested benefits such as the Canada Child Tax Benefit or Guaranteed Income Supplement. While the benefits of a RRSP are debatable for low-income earners, the TFSA will provide the tax deferral benefits of a RRSP without any of the drawbacks.
Jonathan Chevreau notes that the TFSA allows income splitting because attribution rules do not apply for income earned within the account. This would allow a higher-income spouse to split income by contributing to the TFSA of a lower-income or stay-at-home spouse.
My personal opinion is that the TFSA is a vast improvement over any half-baked scheme to defer capital gains. The downside: now we have to add TFSA to the traditional debate over whether contributing to a RRSP is better than paying down the mortgage.
Update:
Rob Carrick calls TFSA, an investors new best friend.
I really don’t understand comments like the one made in this Toronto Star article: “The most a high-income taxpayer in Ontario would save on a $5,000 deposit is about $92.20 in tax if he or she earned a 4 per cent interest rate”. How about thinking a little bit longer term? If the maximum is contributed for 10 years, assuming no growth and a 4% return, no taxes are due on $2,000 of investment income in that year and the next and the next. IMHO, that’s pretty awesome!
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63 responses so far ↓
1 nobleea // Feb 26, 2008 at 7:19 pm
I think this is a great and huge addition to our PF portfolio. I wish the media would make a bigger deal out of it. I like that it’s a flat $5000 for everyone regardless of income.
I have a question though; contributions are not tax deductible, but what about interest paid on money borrowed to make contributions? If this is a parallel to RRSPs, then the answer would be no. But the contributions are made with after tax dollars, so maybe??
Oh, wait, I already got the answer. No.
2 growthinvalue // Feb 26, 2008 at 7:27 pm
I’m with you, CC. What a fantastic development. These TFSAs have the potential to create huge wealth for Canadians. The only thing that could make them better would be to make contributions to the TFSA tax deductible as are RRSP deposits, but that’s just me being greedy.
3 Kris // Feb 26, 2008 at 7:57 pm
I’m curious as to what happens if you transfer pre-existing investments into a TSFA. Will it be like an RRSP whereas you have to pay capital gains, if you make a profit, but can’t claim capital losses if you don’t???
I’m also excited over the fact that I can now hold some ’safer’ investments outside of my RRSPs… which will be very useful when saving for those expenses with a short term horizon.
This really does add a whole new dimension to tax effeciency!
4 squawkfox // Feb 26, 2008 at 8:04 pm
My mind is racing…
5 Canadian Capitalist // Feb 26, 2008 at 8:20 pm
Kris: There is no explicit mention of how contributions in-kind will be treated but my guess is that it will be just like RRSPs, just because a lot of features of the account are similar to RRSPs. You’re right that TFSA will be a great location for interest-bearing instruments.
GIV, noblea: I am very enthusiastic about the new account. There is hardly any downside and it is a great place to put savings.
6 Mike B // Feb 26, 2008 at 8:40 pm
I would think contributions in kind from a non-registered account would not be taxed going in as long as the contribution doesn’t exceed $5000, reason being is both are from after tax dollars. But then again it raises the question if you purchase a stock in a non-registered account, transfer it in and then sell the stock in the TFSA, then you could withdraw tax free. I am interested in the details. Food for thought.
7 Four Pillars // Feb 26, 2008 at 8:56 pm
I think this is fantastic and I also think the rrsp vs mortgage vs tsa debate will be pretty neat - we need a new horse to beat to death!
I think this will encourage saving for sure. It might even help some people with their retirement savings since a lot of people can’t get their head wrapped around the tax deferral of the rrsp and think they are somehow losing money when they pay tax upon withdrawal. The tsa might encourage those people to save.
8 thickenmywallet // Feb 26, 2008 at 9:01 pm
I like the idea. Like to see the details though. Ideally, it should be indexed for inflation .
The downside is that the financial industry will now flood the market with even more PPN’s as a selling tool to “protect” the contribution in the account. The 2009 RSP season is just going to be ugly in terms of bad products being launched.
There is also an opportunity to buy mutual fund company stock since there is another avenue for the industry to pump money out of our pockets.
9 Warren // Feb 26, 2008 at 9:13 pm
Great plan by the government to encourage savings, but not necessarily cost them a lot of money. Although I would have liked to see them spend a little more, or reduce taxes with that whopping surplus.
At any rate, now we have the equivalent of the Roth IRA in the US. Even better, the $5k rolls over like unused RRSP contributions. I think I’ll use my tax refund courtesy of RRSP contributions to fund my TFSA.
10 brad // Feb 26, 2008 at 9:27 pm
I was going to say the same thing about the Roth IRA analogy, but the TFSA is actually much more flexible. With the Roth, you are only allowed to make early withdrawals of up to $10,000 for buying your first home (and maybe also for costs of education, I can’t remember).
11 Canadian Capitalist // Feb 26, 2008 at 9:51 pm
Mike B: It’s not clear how in-kind contributions would work but if it does the way you describe, it will be a huge bonus for people who have investments with very low ACB.
Mike: You’re right about beating a new horse now. I already saw some articles discussing mortgage versus TFSA.
Thicken: The budget document mentions that the contribution limit is indexed to inflation in $500 increments. It is true that stupid investments will continue to be so. Bay Street is so good at introducing products to meet new “demand”.
12 Pharmadaddy // Feb 26, 2008 at 10:06 pm
CC:
I guess I’m exposing my relatively recent arrival to your blog, but where do you stand on the paying down the mortgage or beefing up RRSP contributions debate and what, if any, empirical evidence do you have to support your stance? Just curious as someone who has debated this internally for some time. I ran numbers and it seems that no matter what assumptions I made, contributing to the RRSP always came out on top in the long run.
13 Leading Edge Boomer // Feb 26, 2008 at 10:23 pm
It will be interesting to see if banks and and other financial institutions design high interest TFSA accounts to encourage people to park their cash with them.
14 Thicken My Wallet » Blog Archive » How to Profit from A Tax-Free Savings Account // Feb 26, 2008 at 10:26 pm
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15 cnidog // Feb 26, 2008 at 10:55 pm
I’m no financial expert, but I’m not sure the TFSA the greatest thing since sliced bread that the conservatives claim it is.
Firstly, it is nowhere near what the conservatives originally promised regarding capital gains being tax exempt if reinvested within 6 months.
Second, it is being pimped as a great way to save for a car, a home reno, etc. If you’re going to have this kind of short-term turn around - where you are cashing out in 3-5 years - you had better invest in something pretty secure. Well guess what! Thousands of people already save for such items in “high interest” savings accounts like PC Interest First (3.78% - 4.0%). Do you think that any of them have ever recorded as taxable income the paltry $189 in interest on their $5000 saved?
Third, if you suffer capital losses on this money, you won’t be able to write them off. So, once again, you’d probably be wise to restrict this account to low risk investments (unless perhaps you have a long-term outlook and assume that all investments eventually go up).
And fourth, you can’t write of interest from an investment loan for instruments bought inside the TSFA. So it appears to be of little assistance to people using the smith manouever or cash flow dams to convert non-deductable debt to deductable debt.
Now don’t get me wrong, the TSFA is still useful. If your non-registered portfolio consists of some secure investments like GICs and some stocks, you may as well put as much of your low risk, interest-earning investments in the TSFA as you can and save a few bucks. It will also offer a small, albeit useful contribution to income splitting. But for me, it ain’t even close to what the conservatives originally promised.
16 Canadian Capitalist // Feb 26, 2008 at 11:07 pm
cnidog: You won’t find me arguing that the TFSA is anything like the capital gains exemption. That said, the original “promise” was very vague and probably impractical. And critics with some justification would argue that the capital gains exemption is a tax break for the risk. Also, since when did campaign promises mean anything?
If anyone receives $50 or more in interest income, a T5 is issued and has to be reported in taxes. Even for small amounts, I simply add up interest payments and report it in my taxes. Not the worth the risk of “forgetting to declare” in my opinion.
I do question the notion that TFSA saves a “just a few bucks”, as one prominent economist claimed in a CBC interview today. It’s true that initially the tax savings aren’t huge but over time, the advantages afforded by the new savings scheme is tremendous.
17 cnidog // Feb 26, 2008 at 11:21 pm
CC: Maybe I’m jaded, but I often find that the savings espoused by experts are based on optimistic returns and assumptions about high marginal tax rates. Not everyone is going to earn 10% on average on their investment and the average Joe on the street often doesn’t have a 40% marginal tax rate.
18 Canadian Capitalist // Feb 26, 2008 at 11:53 pm
cnidog: Taxes in Canada are a killer on investments. Even someone earning $38K in ON faces a marginal tax rate of 31.15%. I would definitely agree with you that TFSA won’t bail us out of poor investing. We still need to invest responsibly to achieve financial success.
19 nobleea // Feb 27, 2008 at 12:06 am
i see the opposite.
if you have a stock position that is sitting on massive gains (either from being very speculative or having held it for a long time), you can transfer it in to the TFSA, sell, and then withdraw it and reinvest it outside.
this way you still get the ‘benefit’ of capital losses outside the TFSA, but don’t pay capital gains on the upside.
since it’s a cumulative contribution amount, plus spousal plan options (?), in 5 years, you could be sheltering 50K in gains ($9000 a year tax savings at 36% marginal rate)
20 DividendMan // Feb 27, 2008 at 12:14 am
I read a comment that you cannot take a loan to invenst money into this registered account and claim the interest as a deduction, is that true?
21 Canadian Capitalist // Feb 27, 2008 at 12:42 am
DividendMan: It’s true. Refer to Page 274:
Because the investment income within, and withdrawals from, a TFSA will not be taxable, interest on money borrowed to invest in a TFSA will not be deductible in computing income for tax purposes.
22 WhereDoesAllMyMoneyGo // Feb 27, 2008 at 1:02 am
I think the transfer from non-registered accounts in-kind of securities with an unrealized capital gain will trigger a deemed disposition - not sure, but that’s my guess.
There are many opportunities for the TFSA. Including from an estate planning perspective: you can roll-over the assets of the TFSA to a successor account holder tax-free (say a spouse). The remaining spouse can transfer to the children tax-free as well.
You can contribute to an RRSP in a high tax year, and withdraw in a low tax year and immediately put funds in a TFSA.
It’s great for those who are low tax bracket now and low tax bracket in retirement as it might be the retirement savings vehicle of choice while the RRSP becomes the short term savings vehicle. The TFSA withdrawals won’t affect income tested benefits and credits so it would make more sense to use it for retirement for people in this situation, and the income tested benefits and credits might not be available to people before they are 65 so any funds in an RRSP can be withdrawn before then without affecting those benefits.
I can see many strategies for this, and yes more fodder for some old debates!
23 Pablo // Feb 27, 2008 at 1:24 am
Wow! This is so fantastic. Finally something like a Canadian version of the American Roth but without all the penalties. I can’t wait to open an account in 2009. What a great place to store your tax refund.
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27 0xCC // Feb 27, 2008 at 9:27 am
The potentially interesting part about the ‘no deduction for interest on money borrowed to invest in a TFSA’ thing is that there is potential that the brokerages could calculate margin availability based on the value of both the TFSA and non-registered accounts. So in effect you could be able to borrow against the value of the TFSA for investment outside the TFSA and deduct the interest. The brokerage house has their ‘assets’ covered because if you do get a margin call you could withdraw from your TFSA to cover it.
This TFSA has the potential to be a very nice little financial tool. The only slight catch with it is that you have to do a little bit of planning for it to really pay off. This is going to be an amazing tool for young people just starting out. They can save for a down payment on a house, they can save for buying a car, they can start up an investment account without starting up an RRSP and being scared that the RRSP money is locked away ‘forever’ and then they can make a contribution from their TFSA to their RRSP when it makes sense to them.
28 Eric // Feb 27, 2008 at 9:29 am
So what kinds of things can you put in a TSFA? Is it all the stuff currently elligible for RRSP or are there more/less restrictions? Withdrawals are still taxed as income in that year correct?
29 0xCC // Feb 27, 2008 at 10:09 am
Everything that is eligible for RRSPs are eligible for the TFSA. Withdrawals are *not* taxed at all which is the main reason for the account. Contributions do not generate a tax deduction so withdrawals do not generate tax. The TFSA is basically the inverse of an RRSP. RRSP contributions are tax free but withdrawals are taxed, the TFSA contributions are taxed but the withdrawals are not. In both accounts the investments inside the account grow tax-free.
30 0xCC // Feb 27, 2008 at 10:13 am
Just to be clear when I say that TFSA contributions are taxed I mean that you pay whatever tax you had to pay to generate the cash (whether that is income tax, tax on interest, tax on capital gains, tax on dividends doesn’t really matter) so it isn’t like that is an additional tax on cash that is contributed to a TFSA, you just don’t get a tax deduction on contributions like you do with an RRSP.
31 Steve Heath // Feb 27, 2008 at 10:13 am
I think the biggest benefit, that I can see, is for my elderly relatives that all have RRIF’s and can no longer contribute to their RRSP’s, this will help them a lot since all of their income is interest on savings, and by the time we all become seniors it might be a very significant part of our retirement savings.
32 Canadian Capitalist // Feb 27, 2008 at 11:43 am
Steve: Exactly. I’m surprised that the naysayers don’t realize how great a savings tool the TFSA will become over time. In just 10 years, between an individual and spouse, the TFSA will have more than $100K in contribution room alone. It’s hard to find a downside to the account - it will be a great place for emergency savings, saving for a renovation or a vacation or an automobile, saving for a downpayment. Seniors and others receiving income-tested benefits can withdraw without worrying about how it will affect their benefits. Overall, I think it is a great new tool for savings.
33 Dave from GP // Feb 27, 2008 at 11:44 am
I wonder what the financial institutions will charge as a fee to “manage” such an account?
34 victor // Feb 27, 2008 at 2:13 pm
thanks for you article.i will share it with my boomerpartner on meet on BoomerMingle.com . c o m
35 Greg // Feb 27, 2008 at 3:45 pm
Hello,
Most articles on the new TFSA mention the tax savings are identical to an RRSP. You either pay tax up front or at withdraw time. Am I missing something? It appears to me if 5,000 dollars in an RRSP grows for 20 years to become 25,000 you have pay tax on 25,000 as you withdraw. 5,000 dollars in a TFSA that grows to 25,000 in 20 years only paid tax on the original 5,000?
Anyone able to point out where my thinking is incorrect?
36 Canadian Capitalist // Feb 27, 2008 at 4:13 pm
Greg: The $5K you put in a RRSP was before taxes, so you would have received a tax refund for your RRSP contribution which can also be put back into the RRSP. If your tax rate during contribution and withdrawal are exactly the same, the RRSP and TFSA would offer identical benefits.
37 Keith // Feb 27, 2008 at 6:03 pm
I am willing to forgo a tax reduction from an RRSP contribution today in order to receive a tax free withdrawl from a compounded investment or deposit.
38 Randy Tait // Feb 27, 2008 at 7:04 pm
If you could find a way to get this account big-fast you would have a seriously unbalanced and unfair advantage over most people.
What exactly can this TFSA invest in? So far I hear, stocks, bonds and GIC’s.
No real estate, or owning your own mortgage investing available?
39 nobleea // Feb 27, 2008 at 7:27 pm
Should be able to own anything you can own in RRSPs. Stocks, options, bonds, GIC, ETF, mutual funds, bullion, and your own mortgage too. But I think the admin fees to set that up are pricey, plus I assume you have to have the 200K (whatever the mortgage amount is) in your TFSA first before you can loan it out to yourself in the form or a mortgage.
Now that I’ve thought about it, not being able to claim capital losses for stock held inside the TFSA is really of no consequence. Capital losses can only be applied against capital gains. You’re just reducing the tax hit of capital gains, you’ve already lost the money. TFSA does the same thing, and better by not taxing you on capital gains, period. Having a capital loss outside the TFSA is only useful if you have capital gains outside the TFSA.
CC, did you mean to say “If your MARGINAL tax rate during contribution and AVERAGE TAX RATE at withdrawal are exactly the same, the RRSP and TFSA would offer identical benefits.”? Or am I not understanding the situation?
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41 webb // Feb 28, 2008 at 1:13 am
This is especially good because it also illustrates that an RRSP provides effectively tax free growth - which most people don’t understand. When you compare the RRSP after tax result with the TFSA and see that they are the same - and then consider that the TFSA is truly tax free growth the tax effectivness of the RRSP becomes clear.
Here is a defining example. Assuming 35% marginal tax rate throughout. Put $1000 in an RRSP - you get $350 tax reduction so that your out of pocket cost is actually $650. At the same time put $650 into a TFSA. The cost for each is the same (although the RRSP balance shows as $1000 - but that is before redemption). Say you wait until these two accounts double in value. RRSP now shows as $2000. and the TFSA shows as $1300. Cash them in - you pay $700 tax on your RRSP (35% Marg Tax Rate) and have $1300 after tax - double your actual $650 cost. Also you cash in your TFSA - no tax. Same $1300. Both give you effective tax free growth as long as your tax rate is the same. Because of impact of GIS and OAS clawback, clawback of age amount and other social clawbacks such as pharmacare deductibles the effective marginal tax rate for the RRSP is often higher in retirement than while working.
It is interesting to note that even the so called advantage of a tax refund for an RRSP contribution is illusory. Is it any better to have to put $1000 in an RRSP to get $350 back than just putting $650 in the TFSA instead. Both leave you with $650 less in your pocket at the time of contribution and both are worth the same at redemption.
42 Wealth Manager // Feb 28, 2008 at 1:18 am
I’m surprised nobody has pointed out we have yet another debate brewing here: that being TFSA vs. RESP.
Sure you miss out on the CESG but on the flipside, if your children don’t head off to a qualified institution or you’re out of RRSP room…yikes.
At least I’ve got a year to think through how I may be able to best fit this into my overall strategy.
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44 nobleea // Feb 28, 2008 at 11:54 am
One of the big benefits, I think, is for families that have one big income earner, and a stay at home parent. The spousal RRSP should be maxed out, then after the holding period (3 yrs), the stay at home parent can withdraw enough each year to reach the exemption limit and then move that cash over to the TFSA. All that money has now become tax free from the time it was earned to the time it will eventually be spent.
This would have to be done in 3 or 4 yr spurts (due to attribution rules). For a high income earner in the top bracket, this could have the effect of saving approx 2K every year in taxes and even more in the future due to the tax free withdrawals of the TFSA.
45 Mark L // Feb 28, 2008 at 3:15 pm
I think this new TFSA is one of the best ideas to come out of government in a long time. If a young person is able to put money into this account over their entire working life, they will have a a lot of money to withdrawl tax free in their retirement. As a bonus, they may still be able to collect old age pension and other available government money. The only downside I see to this, is the provinces (especially Ontario) taxing the income generated in the plan each year. I also see future federal governments scalling this program back or making people include the income generated in the plan be includeing in Net Income for eligiability in various social programs, once they realize how much tax revenues this plan will cause future governments to forgo. Starting next year, take full advantage of this plan !!
46 Anonymous // Feb 28, 2008 at 3:56 pm
What a joke, I can not believe people for for these government scams - are you all really *this* stupid?
The money you put into this is *after tax* - Rev canada has already taken 33% or more of your income out of your pocket before you can even think about investing it. So lets say you invest it at what 4% tops? Inflation sits around 2% so you are making 2% and you dont pay tax on this - big deal! Its peanuts compared to the wad of cash that has been ripped out of your back pocket already.
And what about the cost of managing these accounts? Taxes pay the wages of people whose job it will be to police the rules -so you are going to have to pay more taxes for the privilege of not paying taxes!
Come on people wake up and smell the ripoff.
47 Canadian Capitalist // Feb 28, 2008 at 6:07 pm
webb: Very few people pay a higher average tax on RRSP withdrawals than the tax rate on their contributions. That’s a key advantage of RRSPs and will remain so.
Wealth Manager: Tomorrow’s post will compare RESP with a TFSA.
MarkL: It’s certainly possible that the rules can be changed in the future. Look at how many rules have been changed/tinkered with in RESPs and RRSPs in just the past few years.
Anon: The TFSA now allows you to earn a 2% real return compared to 0.64% you would have in a taxable account using your example. That is 3 times more than earlier. How does that qualify as a “ripoff” or a “scam”?
Now in the first year you are right that your savings amounts to peanuts. But in 5 short years, a household of two adults can save $660 in taxes by taking full advantage of these accounts. I don’t know about you but it is not peanuts anymore to me.
48 dcml // Feb 28, 2008 at 11:55 pm
It is absolutely good news to those who have investments in their non-RRSP account. They can gradually move their investments into TFSA ($5000 a year) and don’t have to pay any tax on any capital gains, dividend income, etc. There is also a lot less works to be done at income tax time for someone who did a lot of trading during the year as there won’t be any need to calculate and report the capital gains/losses inside the TFSA. Last but not least, don’t forget that you can have both RRSP and TFSA at the same time.
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50 JW // Feb 29, 2008 at 12:09 pm
I ran a few scenarios in Excel: deposit $5000 per year into a TFSA vs. a regular non-registered account. The assumption is that returns will be fully taxable in the regular non-registered (which is only valid for fixed income investments)
Case 1: 40% marginal rate, 4% annual return
In TFSA after 20 years: $148,890
In regular non-reg. after 20 years: $126,445
Benefit: $22,445 or 17.8% more savings
Case 2: 30% marginal rate, 4% annual return
In TFSA after 20 years: $148,890
In regular non-reg. after 20 years: $131,652
Benefit: $17,239 or 13.1% more savings
Case 3: 40% marginal rate, 6% annual return
In TFSA after 20 years: $183,928
In regular non-reg. after 20 years: $142,860
Benefit: $41,068 or 28.7% more savings
Case 4: 30% marginal rate, 6% annual return
In TFSA after 20 years: $183,928
In regular non-reg. after 20 years: $152,018
Benefit: $31,910 or 21% more savings
So as a long term investment tool, the difference is not peanuts.
51 JW // Feb 29, 2008 at 12:21 pm
My question about the TFSA is whether the provinces are obliged to treat returns in such accounts as tax-free for the purpose of provincial tax payable. I believe the rule outside of Quebec is that the provinces have to accept the federal definition of net income and can only fiddle with the tax rates on net income and certain tax credits?
If so, then would this mean that the provinces must treat returns within a TFSA as non-taxable income or have to exit the agreement to let Ottawa collect their provincial income taxes for them?
52 Canadian Capitalist // Feb 29, 2008 at 3:04 pm
JW: I believe the provinces have to play along for exactly the reason you cite. But I don’t know enough to say for sure. People routinely underestimate how corrosive taxes are on investment gains as your numbers clearly show.
53 Kerr // Mar 2, 2008 at 3:13 am
Is there a way to house a real estate investment in the new TFSA? If so, what would happen after 5 years when the investment is sold and there was a net profit?
54 Canadian Capitalist // Mar 3, 2008 at 1:30 pm
Kerr: I might be wrong but I don’t see how you can out a real estate investment within a TFSA. For example, you can hold a mortgage within a RRSP but it doesn’t make sense for small mortgages due to the fees involved. Holding a mortgage within a TFSA will not be an option in the initial years after it is introduced due to the $5K annual contribution room growth.
55 Binda // Mar 6, 2008 at 10:59 am
I am new in Canada. I hardly understood RRSP it means we put our money in RRSP but we can’t withdraw whenever we need for other than Mortgage. Second the hot news of budget of 2008 is TFSA. My questions are :
how much money should I diposit for the statrt?( minimun)
What happen if I couldn’t diposit every year or same amount?
After how lomg we can withdraw our money? Should we pay any charge for this? if ther is no any penalty or charge then thats difference this TFSA and Saving account that we currently have.
Can somebody help to clear about this.
thank you
56 Canadian Capitalist // Mar 6, 2008 at 11:52 am
Binda: The annual maximum allowed contribution to a TFSA is $5,000. The minimum is up to you.
You don’t have to contribute every year or even contribute the same amount every year. Your contribution room increases by the amount of contribution you did not make.
I believe there won’t be any restrictions on when you can withdraw your money. Regarding fees, we have to wait and see what the financial institutions come up with.
I highly recommend reading the brochures and media articles on the new account. You can find them under the category TFSA.
57 Patrick // Mar 7, 2008 at 3:01 pm
cnidog - it’s not $5000 they can save for 3-5 years. It’s $5000 PER YEAR. If you’re saving for 5 years, that’s $25000 in the account for an average of 2.5 years, so it earns about $2500 in interest at 4%, and you’d be saving about $1200 in taxes at the highest bracket. Sign me up.
(And yes, I do claim my bank account interest as income. Does that make me a chump? I didn’t know it was considered optional.)
58 Christine // Mar 7, 2008 at 3:56 pm
Patrick: You are right - reporting interest income is NOT optional. By law, everyone has to report it regardless of whether their financial institution issues them a T5 or not.
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60 JamesW // Apr 5, 2008 at 10:16 am
I see that Ontario has confirmed that TFSA will be tax-free for provincial tax purposes.
61 jimbo // Apr 7, 2008 at 1:16 pm
So whats the deal if, after it’s ready, I take my TFSA income and use it to contribute to RRSP. Then taking the return back into TFSA now that there is room of course.
Am I getting a tax break on tax free money? sounds too good to be true. Can someone with a head for math tell me if there is a real advantage there?
62 steve // Apr 23, 2008 at 10:21 pm
I have played a lot with the TFSA, using the actual taxation math, not simply average or marginal tax rates. (remember, income tax is time dependant… the tax brackets are indexed)
I simply cannot make a case for doing anything other than maxing your TFSA (if you can) and dumping the remainder into your RRSP.
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