There are numerous benefits to a Tax Free Savings Account or a TFSA for short. TFSA's were introduced to Canadians in the 2009 Tax year to help create assets that were able to grow tax free after you had used after tax dollars to contribute. What this means, is you will not get a tax deduction for your contributions  like you normally would with a traditional RRSP or Registered Retirement Savings Program, but the benefit is the money will grow tax free for the life of the TFSA.

This is a very powerful benefit, as I wrote in a previous Blog about paying Tax on the Seeds instead of the Crop as found here. 

The general rules are that every Canadian over the age of 18, with a valid SIN can contribute a maximum amount of $5,000 per year into their TFSA account. Any unused room will be carried forward, and any withdrawals from your TFSA will be re-credited to you in the following tax year. Lets look at an example;

Bob & Margaret; in their 40's

As of today's date, Bob and Margaret have never contributed to a TFSA as of yet, so automatically they are able to contribute 3 years (2009, 2010 & 2011) worth of $5,000 contributions each, so they could deposit $15,000 each into their new account.

They will not receive a Tax Deduction for the contribution, so it will be made with "after tax" dollars.

As their money grows, it will not be subject to any capital gains tax.

When they make a withdrawal from their TFSA, it is not included in the income tax for that calendar year, so they pay no income tax on the money received from the TFSA.

Even as the TFSA grows through good investing and time, there is no further income tax due.

It will not offset future benefits such as Old Age Security or Pension balancing.

Any money they take out of the TFSA will be re-credited to them in the following year. So for instance, if they took $10,000 out of their TFSA in calendar year 2011, in the calendar year of 2012 their maximum contribution will be raised to $15,000 ($10,000 for their 2011 withdrawal and $5,000 for the 2012 maximum contribution)

Even over time, there is an indexing feature, so that in the future they will slowly be able to add more than $5,000 per year, depending on the inflation rate here in Canada.

All in all the benefits of a TFSA are great, the only drawback is the amount of money you can contribute up to this point, with a cap of $5,000 per year, you are not able to make very large deposits that you may like to.

But having a TFSA in your warchest of saving vehicles will only help you and your family in the future.

My 5 best reasons for setting up a TFSA

1. You can use it as a 90 day Emergency Fund, this way if you run into any financial troubles, you will be able to draw the money from the most tax efficient source without having to pay taxes on any growth inside the account.

2. It is a great way to slowly supplement any future education costs of your children, outside of an RESP.

3. If you draw the income at retirement, it will not reduce any of your other benefits such as Old Age Security.

4. Through the magic of compounding and investment growth, you will have a nice account value years from now, that will be free from Income Tax.

5. There are many investment options available to you, so that any investor comfort level can be satisfied in this volatile economic environment we are in right now.

Call our office today to discuss which benefits are of most value to you, and let us help put his valuable tool in place for the success of your financial future.

Also check out this link to the Government of Canada's website for TFSA's

Steffen deGraaf