Information on the TFSA (Tax-Free Savings Account)
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This article is for all of my Canadian friends out there.
Early in 2008, the Canadian government announced that TFSA accounts would become available starting January 1st, 2009. TFSA stands for Tax-Free Savings Accounts.
The Tax-Free Savings Accounts will be offered by all of the major Canadian banks, and should definitely be taken advantage of. This is a tremendous saving opportunity for all 18+ Canadians. Here is how they work:
The Canadian government will allow every Canadian that is over the age of 18 to contribute to their TFSA on an annual basis. Canadians will be allowed to contribute up to a maximum of $5,000 every year. The maximum contribution levels will be indexed to inflation every year, and rounded to the nearest $500.
The major selling point of the TFSA - investment income and capital gains can accrue TAX-FREE. This even applies to when you withdraw the money from your TFSA. As an example, if you invest $5,000 in mutual funds, watch the funds increase 20% in value over the course of 12 months and then decide to withdraw the full $6,000 to pay for a new car, you will not have to pay a DIME of tax on any of your profits.
If you contribute diligently to your TFSA over the next 30 years and end up realizing a total profit of $2 million dollars from your investments, you will not have to pay a DIME of tax on this money when you withdraw it. This is 100% tax-free savings for Canadians.
Contributions to a TFSA, unlike a RRSP, are not tax deductible. On the other hand, you do not have to pay tax when you withdraw your money.
Another benefit of the TFSA - you can withdraw your money at any time with absolutely no penalties. Also, if you contribute $5,000 for a total of 4 years and then decide to withdraw the entire $20,000 plus profits, the contribution levels roll over to the next year. So, you could put $25,000 into the TFSA in year five if you wanted to.
Or, if you can only contribute $3,000 to the TFSA in 2009, you would then be able to contribute $7,000 in year 2, as you would have $2,000 rolled over from 2009 to 2010.
Some important pieces of information:
-withdrawals are tax-free (as mentioned)
-contributions to a spouse's or common-law partner's TFSA will be allowed
-qualified investments include all arms-length RRSP (Registered Retirement Savings Plan) qualified investments
-TFSA assets are transferable to a spouse or common-law partner upon death
Most banks are offering pre-registration of a TFSA account before January 1st. I would expect that there will be a rush of people looking to sign-up on January 1st, so you may want to head over to your bank today.
Filed under: General Knowledge