Tax Free Savings Account
RRSPs have two major advantages:
• The Tax-Free Savings Account (TFSA) comes into effect January 1st 2009
• You can invest $5500 per year
• Contributions are in after tax dollars
• Earnings are tax free (not tax deferred like RSP)
• You can hold mutual funds, GIC's, securities, bonds and possibly certain shares of small business corporations in your TFSA
• If you take money out of your Tax-Free savings account you don't lose your contribution room.
• Unused contribution room gets carried-over
• There is no limit how long the contribution room can be carried forward.
• You must be 18 years old and a Canadian resident to open a Tax-Free Savings Account.
• You can withdraw funds for any reason as long as the underlying investment can be withdrawn
TFSA or RRSP
If you plan on incorporating savings within a TFSA into your Retirement plan consider the following:
• TFSA's are tax-free, therefore, if you expect to have more income at retirement (due to investment income or mandatory rrif withdrawals) than you do now then with a TFSA you will not be taxed at withdrawal like tax-deferred RSP's and RIF's
• If you expect to have less income in Retirement than right now consider that your tax-deferred registered plan reduces the tax you pay now on contributions and will tax the contributions later at your new lower tax rate when you withdraw in retirement
• If you plan on possibly needing the money before retirement TFSA's can be withdrawn and the contribution room gets added to your next years contribution room. For RRSP's withdrawn amounts can never be re-contributed later.
• # Tax-deferred income in RSP's will be taxed at the full income tax rate of the contributor at the time of withdrawal. The earnings may have been from dividends and capital gains that are actually taxed at lower rates when held outside an RSP.
• TFSA's tax-free status means that you actually save more on taxes when interest income bearing investments are held inside rather than investments that base their returns on capital gains or dividends (without other overall tax strategies considered)
• If your pension adjustment leaves you with very little room to contribute to RRSP's then a TFSA is another investment option that provides tax benefits
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