Wednesday, October 28, 2009

TFSA - Tax Free Savings Accounts

The TFSA (Tax Free Savings Account) introduced by the Canadian Government in 2009 has become a cornerstone of my new investing philosophy. A TFSA is similar to a Roth IRA in the US; after tax monies are contributed, investments gains are tax sheltered within the account and withdrawals are tax free.

Some background on the rules:

Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.
Investment income earned in a TFSA is tax-free.
Withdrawals from a TFSA are tax-free.
Unused TFSA contribution room is carried forward and accumulates in future years.
Full amount of withdrawals can be put back into the TFSA in future years.
Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
Contributions are not tax-deductible.
Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
TFSA assets can generally be transferred to a spouse or common-law partner upon death.

Current investment amounts are only $5000 a year, but in 10 years this will provide an account of $50000 plus any investment growth. This is a significant sum and will be a significant part of any portfolio.