No downside to Tax Free Savings Accounts

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By Greg MacPherson

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If you have money invested outside of an RRSP or other registered account where you pay taxes on the interest or growth, the new Tax Free Savings Account (TFSA) is a no-brainer.

Take the time to look into how this simple account works and it will be an instant improvement to your financial situation.

The new TFSA was introduced in the federal budget this past spring. It is a type of account (much like the way an RRSP is a type of account) that you can in turn put almost any form of investment into.

Your TFSA could be made up of GIC's, savings bonds, mutual funds, or even a daily interest savings account. How you invest your TFSA money is completely up to you.

You do not get a tax deduction for putting the money in like you would with an RRSP, nor are you taxed on any of the withdrawals. In fact, the withdrawals are not considered income at all. This means that it will not be taxed and it will not count against you for other things like the GST credit.

While the money or investments sit in the TFSA you will not be taxed on any of the interest or growth from the investments.

In other words, it truly is a Tax Free Savings Account. No more T3's or T5's for interest income, dividends or capital gains. The investments will simply grow as if taxes did not exist for that amount of money.

The limit to a TFSA is a maximum of $5,000 per year. Like RRSP room, it will accumulate if it isn't used.

Therefore, after five years from now you will have $25,000 of TFSA contribution room (give or take some adjustments the government will make for inflation indexing).

Unlike RRSP room, you will get your contribution room back if you make a withdrawal.

It can therefore be used a bit more like a true savings account without the fear of not being able to put the money right back in.

If you have any money that is invested in an account where it gets taxed, $5,000 of it might as well be sitting in the form of a TFSA as of Jan. 1, 2009. Your spouse should also do $5,000 in their name.

Not sure if you should contribute to an RRSP or a TFSA?

Well there are several factors to consider, but the general rule is that if you are going to be in a lower tax bracket when you withdraw the money than you are when you contribute, you should put it in an RRSP.

Likewise, if you are going to be in a similar or higher tax bracket when the money is withdrawn, you should use the TFSA.

Most firms that offer RRSPs are offering TFSAs. In many cases, you can create the accounts now and make the contributions in January.

The opinions expressed are those of the author and may not necessarily be those of Manulife Securities Incorporated, Member CIPF. Greg MacPherson, BBA, CFP, FMA, CSA, FCSI is a Financial Advisor in the Woodstock branch. Contact his office with questions or to book an appointment: 328-8889