Canadians’ options when saving for retirement were broadened in 2009 with the introduction of the Tax-Free Savings Account (TFSA). The TFSA is a registered savings account that allows you to earn tax-free investment income to more easily meet lifetime savings needs.
The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA. Any income earned within a TFSA is tax-free. Money withdrawn from a TFSA is also tax-free. Unused TFSA contribution room is carried forward and accumulates in future years. So if you only contributed $1000 in 2010, the other $4000 allowance carries forward, and in 2011 you can contribute up to $9000.
How does a TFSA compare to an RRSP?
Unlike an RRSP, if you withdraw money from your TFSA, you can contribute that amount again in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax. For example – you withdraw $3000 in May to cover a small renovation project. Re-contributing $3000 in November could trigger a penalty tax* but if you wait until January, you are fine.
Like RRSPs, TFSAs are a type of account, in which you can buy a range of investment products such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
Unlike RRSPs, contributions to your TFSA are not tax-deductible.
Withdrawals from your TFSA are not considered income. Thus, unlike RRSPs, 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.
You can’t specifically open a spousal-TFSA as you can with an RRSP, but 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.
*Whether or not you actually pay a penalty tax will depend on your available contribution room. If you find yourself in this situation, speak to a financial adviser before making your contribution.
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{ 1 comment… read it below or add one }
It seems to come down to your marginal tax rate now vs what you expect it to be in retirement. There is a good calculator to figure out if you should put your money in RRSPs or TFSAs here