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On the first day of the New Year, the government of Canada added Tax Free Savings Account (TFSA) contribution room for each Canadian aged 18 or older. Since 2009, the TFSA has grown to be an important part of most long term financial plans.
Although it is called a Tax Free ‘Savings Account’, your TFSA can hold a variety of investments including GIC’s, mutual funds, stocks, etc.
What does this mean for you? You are able to set aside money in a savings or investment vehicle that can have distinct tax and estate advantages.
Who can really benefit from a TFSA? All Canadians!
- Lower income: set aside rainy day money and not pay tax on growth or withdrawals. Withdrawals do not impact eligibility in government programs.
- Young Savers: ambitious savers that will in time wish to make a large purchase such as a home. Growth is all tax free and when the funds are withdrawn they do not have be repaid or taxed as with the Home Buyers Plan.
- Middle Income: the TFSA can augment retirement savings with dollars that will not incur any tax now or upon withdrawal. It can provide the ability to leave a tax free legacy as well.
- High Income: even in the highest tax brackets, there is no tax on growth or withdrawals. Legacy opportunities exist as well.
- Retirees: can withdraw from the TFSA without impacting their taxable income or participation in government programs. Withdrawals will not trigger an OAS claw back.
- Estates: in some cases where there are named beneficiaries, TFSA’s can flow to the next generation, bypassing the owner’s estate without creating a tax liability for the estate.
You can find out more about TFSAs by checking out Canada Revenue Agency's website.
Here is a link to a fun QUIZ we have prepared to test your knowledge of TFSAs…Enjoy!