Tax – free saving accounts (tfsa)

A relatively new investment vehicle, the tax – free savings account (TFSA), has been enacted and became effective in 2009. A TFSA essentially allows the individual to invest up to $5,500 per year for 2013 and 2014 ($5,000 per years for years prior to 2013). No tax will be lived on income or capital gains on these investments so long as they remain in the plan, and they can remain there indefinitely. On the other hand, the individual can withdraw amounts from the plan, including original contributions and accumulated earnings and gains, without penalty and without any tax inclusion for any purpose. www.insuranceplancanada.com

A TFSA is similar to an RRSP in that it is a trust account administered by a bank, trust company, credit union, or annuities issuer (typically a life insurance company). One may open such an account upon reaching 18 years of age. The individual is the "plan holder", and the bank, trust company, etc., is the "issuer". www.insuranceplancanada.com

Contributions could be made to a TFSA of up to $5,000 for 2009, anther $5,000 each year for 2010 t0 2012, and $5,500 for each subsequent years.

TFSA contribution room amounts are truly cumulative: the contribution limit is $5,000 for 2009 and if no contributions were made in 2009, the $5,000 becomes "unusedTFSA contribution room" available in future years. Moreover, any withdrawn amounts, for any purpose, are added to the unused TFSA contribution room, but only at the beginning of the year following year, it may result in an over contribution that will be subject to a penalty tax.

Contributions to a TFSA are not taxable, so they accumulate free of tax. Contributions are not deductible by the plan holder, and withdrawals are not taxable. The upshot of all this is that the contribution room now builds at the current rate of $5,500 per years. Thus, earnings (and capital gains) in the plan are, essentially, tax free forever, since there is no tax on their withdrawal. Moreover, earning and gains in the plan are not distinguished from original contributions when withdrawn, so that when the plan holder does make a withdrawal that represents both contributions and earnings (or gains), the unused contribution room is increased by the entire amount withdrawn, regardless of source.

The downside, such as it is, is that losses in the plan will never be available for use against personal income or taxable capital gains of the plan holder. Also, there may be fees attendant upon maintaining the plan, and perhaps on withdrawals, and these should be understood before investing in a particular plan.

One of the relative advantages of a TFSA (especially compared to an RRSP or RRIF) is that withdrawals from the TFSA will not be included in income for the purpose of determining eligibility for various income- based credits and benefits, including the age credit and OAS benefits. In other words, unlike withdrawals from an RRSP orRRIF, which can reduce the individual’s age credit or serve to claw back the individual’s OAS benefits, withdrawals from the TFSA will have no effect on such credits or benefits. Furthermore, unlike an RRSP, there is no time limit at which theTFSA must be wound up or converted into another investment vehicle. Thus, theTFSA can be used to fund pre – retirement years or post – retirement year, and there are no limits on withdrawal or the use of the withdrawn funds.

www.insuranceplancanada.com