Tax Free Savings Account (TFSA) – How Can They Help

You’ve decided you need to start saving for an emergency fund – what is a good way to build that fund a little faster? Try a Tax Free Savings Account.

TFSA’s were introduced in 2009 to provide Canadians with a tax-free investment savings option. Although deposits to a TFSA are not tax deductible, all interest and withdrawals are entirely tax-free. In addition to being tax-free, income based benefits such as Child Tax Benefit, Old Age Security and the GST credit are not affected by interest generated or by withdrawals made from your TFSA. The maximum contribution amount is $5000 annually with any unused contribution room carrying forward each year. The room available began accumulating in 2009 or immediately after you reach the legal age limit in your province or territory (generally 18 or 19). For example, John turned 18 this year, so he can contribute $5000, but his father Bill can contribute $5000 for 2009 and an additional $5000 for each year thereafter.

Potential Tax Implications

Special circumstances exist that can trigger taxes. Withdrawals made from your TFSA cannot be re-contributed until the following calendar year (unless carry forward room is available). Re-depositing withdrawals too soon can result in an excess contribution. Excess contributions are charged a penalty tax of 1% for each month that the excess amount remains in the account. If at death your TFSA has excess contributions, this fee still applies. Additional taxes also apply to non-qualified & prohibited investments.

How to Open a TFSA

If you are over the legal age in your province or territory and have a valid Social Insurance Number (SIN) you can open a TFSA. TFSA’s can be used for long, medium and short term savings and can be deposited to a variety of investment options including Guaranteed Investment Certificates (GIC’s), Mutual Funds, High Interest Savings Accounts (HISA’s), cash and bonds. TFSA’s are available from most financial institutions and financial advisors.

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