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Why You Should Open Up A Tax Free Savings Account

tfsa

 

Opening a tax free savings account can save you hundreds of dollars. First lets learn more about a tax free savings account also known as a TFSA. A Tax Free Savings Account (TSFA) is a type of registered plan where you can save or invest up to $5,500 every (1) year. Unlike other types of savings, you are not going to be taxed on the income you earn. This is a great way to save for your short or long-term goals; because it lets your savings grow tax-free and you will earn interest on your savings.

Who should open up a TFSA?

People who want to save for there retirement but can't afford to put in more then $1000 a year into a RRSP might want to consider opening a  TFSA, Downfall to this is you may be tempted to take the money out to spend it on unexpected things. So what I would recommend is once your TFSA reaches over $2,000 Take that $2,000 and invest it into RRSP.

Other example of people who might want TFSA are people who would like to save for a future vacation, car, new computer etc. by putting away $100 a month into a TFSA you will be able to earn interest on the money you put in and you wont have to worry about paying taxes when it comes time for you take out that money.

You may also want to consider opening a TFSA for a regular savings account because you will earn a higher interest and once again don't need to worry about paying any taxes on the interest you will make.

You can contribute up to $5,500 annually to your TFSA and any unused contribution room is carried forward. You don't pay taxes on withdrawals. You can put back any amounts you withdraw2

Unlike a Retirement Savings Plan (RSP), a TFSA allows you to re-contribute amounts that you withdraw, in the year after you withdraw them.

Take A look at the differences between a TFSA and a RSP

 

~~~~~~~~~~~~~~             TFSA               ~~~~~~~~~~~       RSP    ~~~~~~~

Primary purpose Saving for any purpose Retirement savings, home purchase or education.
Annual contribution limit $5,5002 PLUS amounts withdrawn in previous years 18% of previous year's earned income (maximum limits apply), less pension adjustments
Contributions Not tax-deductible Tax-deductible
Unused contribution room Carried forward Carried forward
Growth Tax-free Tax-deferred
Withdrawals You're not taxed on withdrawals.
They do not affect federal income-tested government benefits such as Old Age Security
Money taken out is taxed as income at your marginal rate.
Withdrawals are counted as income and may affect federal income-tested government benefits such as Old Age Security
Withdrawn amounts Added to contribution room in future years Contribution room is lost for amounts you withdraw
Plan maturity None; no upper age limit on contributions End of year when you turn 71
Spousal plan n/a You can contribute directly to a spousal RSP
Eligible investments You can hold savings accounts, GICs, mutual funds, stocks, bonds You can hold savings accounts, GICs,mutual funds, stocks, bonds
Age minimum 183 N/A

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