Tax Free Savings Account

In the 2008 Conservative budget, one of the most important changes that affect Canadian families is the introduction of the Tax Free Savings Account (TFSA). This is one of the most important savings vehicles since the introduction of Registered Retirement Savings Plan (RRSP).

Similarly to an RRSP, all money and investment inside the TFSA grows tax free throughout its lifetime. This article will ex-amine the features of the TFSA and explain some of the uses of this tool. While RRSP is strictly designed to be a retirement tool, TFSA is designed to be for anything else.

A TFSA is designed to provide Canadians with a flexible tool to save money. You can use a TFSA to save towards your next vacation, home improvement project, or as a down payment towards your next home.

There are few important differences between RRSP and TFSA:

1. The amount of RRSP contribution can be used to reduce the income and deduct tax, while contributions to TFSA is not tax deductible;
2. Any amount withdrawn from the RRSP is considered taxable income, while all withdrawals from TFSA is not subject to taxation;
3. Any amount withdrawn from the TFSA increases your contribution room by the same amount for the following year, while this is not case for RRSP;
4. The annual contribution room for TFSA is fixed at $5000 (adjusted to inflation), while RRSP contribution room is 18% of your income from last year (up to a certain maximum adjusted to inflation).
5. Unlike an RRSP, there is no requirement to covert the plan into a Registered Retirement Income Fund (RRIF) at age 71 with minimum withdrawal amount.

Other features at a glance:

1. - Canadian residents over age 18 can begin opening TFSA accounts starting in 2009.
2. - Eligible investments are the same as RRSP.
3. - Any unused contribution room will carry over to future years.
4. - The un-used credit of $5000 per year will carry over to the next if you do not contribute the full amount, so after a few years of not contributing, you will have accumulated room for large deposits.