Tax Free Savings Account-TFSA

The 2008 Canadian federal budget released the tax free savings account, or the TFSA.  Some hailed this revelation as the greatest thing since the RRSP while others grumbled that this was too little to make a significant impact on their financial health.  Essentially the TFSA is a savings account that is sheltered against taxation for investments, which includes capital gains, dividends and even interest income.  However unlike the RRSP the money contributed into the TFSA will be money that has already been taxed.  The RRSP allows you to contribute to the account and lower your overall tax rate however this is not the case with the TFSA.  For example say Jim earns 50,000 and contributes 8, 000 dollars to his RRSP.  The portion of Jim's income that will be taxable will be 42 000 dollars.  Now a portion of the money available after that 42 000 is taxed will be eligible for the TFSA.  If Jim has no savings from his earnings this year but has savings from the past, than up to 5000 of those savings would also be eligible.

Some key points of the TFSA

1. All Canadians 18 and older are eligible for the account.
2. Each year a maximum of 5000 dollars can be contributed.
3. TFSA contributions CANNOT be deducted from your income for tax purposes.
4. Any increase in the investment value of securities carried inside the account will not be taxed, nor will dividends or interest income while in the account or when withdrawn.
5. If some years you are unable to contribute the maximum to the TFSA you will be able to carry over contribution space to future years forever.
6. You can take money out of your TFSA at any time for any reason and later replace it without affecting the current years contribution maximum.
7. You can contribute to your spouses TFSA.
8. Yes stocks are eligible for the TFSA.
9. The maximum allowable contribution to your TFSA will increase in 500 dollar increments according to the consumer price index to adjust for inflation.
10. Contributions to your TFSA are made with your 'after tax dollars'.
11. Starts January, 2009

Now whether to contribute to this account or your RRSP depends a lot on your income level and available money.  A key factor to keep in mind however is that money can be withdrawn anytime without any tax penalties unlike RRSP accounts.  Moreover the money contributed wont be able to lower your tax bracket since TFSA contributions are not tax deductible.  In an ideal situation, where money was a non-issue, you could contribute the maximum to both your RRSP and your TFSA.