As of January 1, 2013 Canadians will be able to sock away an additional $500.00 per year in their Tax-free Savings Accounts (TFSAs), making the savings vehicle a bit more effective in reducing a family’s overall tax bill and keeping more hard-earned cash in its pocket.
If you have not been taking advantage of this savings plan, now is the time to open up your own TFSA and start maximizing the benefits. You can make your 2009-2012 contributions, up to $5,000 per year, for a total contribution of $20,000. The interest, dividends and capital gains earned in your TFSA are not subject to tax. Ensure all your family members over the age of 18 also open a TFSA to maximize your household’s tax savings.
Now the TFSA is not meant to replace a Registered Retirement Savings Plan (RRSP) or a defined benefit pension, if your company offers one. All of these savings vehicles can be woven into a cohesive financial plan that will help you reach your long-term financial goals.
Tax-free Savings Account Fast Facts You Should be Aware Of
- As of January 1, 2013, you can contribute $5,500.00 per year to your plan. Any unused contribution room is carried forward indefinitely.
- You don’t get a tax deduction for your contribution to a TFSA, but your savings or any gains you make on your investments are not taxable.
- You can withdraw your TFSA funds at any time tax-free and can re-contribute the amounts back into the plan at a later date.
- The TFSA is a flexible vehicle that can include a high-interest savings account, stocks, bonds, and mutual funds. You can also choose to hold Guaranteed Investment Certificates (GICs) in your account.
- If you contributed $2,500.00 to your TFSA each year, you would have $64,000 in savings after 20 years (assuming an average annual return of 2.5 percent).
- TFSA withdrawals do not affect eligibility for federal income-tested benefits and credits.
- If you over-contribute to your TFSA, you will be required to pay a penalty of 1% of the highest amount in your account for every month the excess amount remains in your plan.
Taxpayers in the 45-65 age groups are most likely to benefit from the government’s announcement since the model of working for one company and then collecting a pension is no longer the reality for most Canadians. For that reason, contributions to an RRSP and TFSA are even more important.
TFSAs for Younger Canadians
Does the Tax-free Savings Account only make sense for people in the 45-65 age bracket? Not at all. It can work very well for younger Canadians as well. You may want to consider making your usual contribution to your RRSP and depositing your income tax refund into your TFSA. The money can start growing within the plan, and you can use it for any purpose you wish, including saving for a big-ticket item, your child’s education, or your retirement.
A TFSA can also be used for an emergency fund. You may want to designate that some of the funds be held in a high-interest savings account so you can access them quickly if you need to get to your cash in a hurry to pay for a major repair or to cover a shortfall in your household income.
So the $500 increase in TFSA contributions is good news if you want to invest without being taxed to death on all your returns. If you or your family members have not yet opened up a TFSA, I can help. As an experienced financial advisor, I can explain how the new Tax-free Savings Account contribution limit will affect you. Please contact me for a personal consultation.