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.