In the last budget, the federal government created a new savings plan called a TFSA (Tax Free Savings Accounts). These savings plans will be available starting in 2009. These savings plans are similiar to to RRSP’s, with some technical but important differences.
| RRSP vs. TFSA | ||
| TFSA | RRSP | |
| Deposts to fund are tax deductible? | No | Yes |
| Growth/interest earned is tax sheltered while inside the fund? | Yes | Yes |
| Withdrawals are taxable? | No | Yes |
| Withdrawals affect other government benefits? (OAC, GIS, etc) | No | Yes |
| Maximum contribution | $5000 | lesser of $19,000 or 18% of your earned income |
Because TFSA’s aren’t taxed on withdrawal as RRSP’s are, and the withdrawals aren’t treated as income and thus affecting your other government benefits, TFSA’s may be a very attractive option in conjunction with or in addition to RRSP’s. They’re less beneficial right now (since you receive a tax deduction for RRSP contributions but not TFSA contributions) however after retirement they have some very attractive benefits.
Unlike some other investments you cannot deduct interest costs if you borrow to contribute to a TFSA. You will likely be able to invest in similiar investments to RRSP’s once these savings accounts become available.
Upon death, your estate will receive the funds from the TFSA tax free. Alternatively (and probably a better idea) you can specify a spouse or partner as a successor account holder - pretty much a beneficiary. That transfer won’t affect their existing TFSA.
So, TFSA’s sound like a great idea in conjunction with RRSP’s. They give us additional ability to grow our retirement savings in a tax sheltered fashion and they won’t decrease our other benefits and income when we withdraw them after retirement.
Coming soon: a TFSA calculator.
{ 2 comments… read them below or add one }
TaxFree Savings Account
This is a tremendous new programme since we can shelter UNREGISTERED INVESTMENTS in a TFSA. Although it may take awhile , if one has the time it can be whittled away at in $5000 chunks over the years 2009 and following. It is possible that in time the allowable annual amount may rise. We will have to wait and see.
Enjoy the opportunity January 2, 2009.
That’s all bang on Cleve. A few further thoughts:
- I’m in the final stages of testing our rrsp vs tfsa calculator. There’s lots of tfsa vs non-reg investment calculators out there, I’ve not seen any that do a side by side of tfsa and rrsp’s.
- In terms of the allowable amount being increased, the plan as I understand it is to increase the benefit with inflation, but only in $250 increments. So it’ll sit at $5000 for a bit, then jump to $5250 and so on. Since we don’t lose any unused contribution room, this will build up substantially over time.
- it’s looking like this is going to be advantageous for two groups of folks. Low income earners and high income earners. First blush seems that low income earners will be better served by putting money into a TFSA so they’re not getting hit with clawbacks. And folks who are either paid primarily by dividends (so no RRSP room) or those maxing out their RRSP’s, this’ll be a great savings vehicle.
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