In 2009, your government gave you a present – the ability to save without any tax obligations. A TFSA (Tax-Free Savings Account) allows an individual, 18 or older, to invest up to $5,500.00 per year. By January 2013 the total allowed will be $25,500.00.
No tax will be levied on income or capital gains on these investments so long as they remain in the plan. On the other hand, you can withdraw amounts from the plan including original contributions and accumulated earnings and gains without triggering tax disposition. You can regain contribution room in the amount of any withdrawals but only starting the following year.
A TFSA is similar to an RSP, in that it is a trust account administered by a bank, trust company, credit union, life insurance companies and investment dealers. A variety of investments can be used such as a savings account, a term deposit or GIC (guaranteed investment certificate), mutual funds, segregated funds, and stocks and bonds.
Many people have opened ”savings account” style TFSAs at the bank or credit union earning minimal amounts of interest. To make the most of this useful financial tool the wise investor looks at ways to maximize the tax free features and potential for investment returns.
Consider for example, June, a divorced woman on limited income. She maximized her contributions to her Tax-Free Savings Account every year and currently has $20,000 in her plan. She is receiving CPP and OAS along with a small private pension. Every penny counts. Instead of investing in a bank term deposit or savings account at today’s relatively low rates, she chose to use her TFSA to invest in a dividend paying mutual fund to increase the potential return on the investment and keep the income tax free. This means no impact to OAS. Because it is tax free income from this source, it will not subject your pension to clawback.
In 2013, June can deposit another $5,500 plus the amount of any withdrawals from last year. This creates a bigger pot which creates a bigger income opportunity. Yes, June there is a Santa Claus
Submitted by: Debra Terry
Personal Financial Planner
BeneWealth Strategies and IPC Investment Corporation
The Benewealth Team
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