Luis Fernando Arce, Staff Writer/Co-Online Editor
Most of us can probably agree that it takes a lot of discipline to save money, discipline which most of us don’t have and only acquire after a few close calls. Some of us may even resort to borrowing money from family and friends to pay for credit card bills that we assumed we’d be able to cover on our own, or for car insurances we can’t afford.
Fortunately, Canadians over the age of 18 can open a Tax Free Savings Account (TFSA) that won’t magically give them money, but will help them save cash on every transaction made in the present and on every investment made for the future. There is a limit of up to $5000 that can be contributed to the account, which are not tax deductible, but which are certainly more than accounted for considering the amount of money saved on taxes on all capital gains and withdrawals (Fig. 1).
The account is a very versatile and convenient option for people looking to invest for the future but wanting access to their money in the present. Unlike other investment funds, a TFSA is not locked in, which means that there are no regulations or penalties surrounding the withdrawal of funds before a certain time. Any amount of money that you put in is available at any time, simply with 24 – 48 hours notice.
And if you really want to be frugal, the account works marvelously because there is no expiration time on it, unlike RRSPs which require you to withdraw your funds by your 71st birthday.
Although the limit on the account is $5000 annually, one of its most attractive features is its indefinite carry-over option. The way it works is by allowing the user to tack onto his next year’s contribution limit of $5000 whatever amount under the $5000 he has left in the current year.
For instance, if by December 30, 2011 you have contributed only $2000 to the account, the year 2012 will allow you a limit of $5000 plus the $3000 that you did not contribute in 2011. Moreover, even if you have contributed $5000 dollars to the account by December 2011, if you withdraw, say $4000 before the year’s end, you’ll have an extra slot for $4000 in next year’s contribution.
Moreover, the flexibility of the account allows income-splitting for tax-purposes (if you’re married or have a common-law partner) by allowing a higher-income spouse to contribute to a TFSA of a lower-income spouse, which won’t see the latter affected as the income earned within the account is not tied to regular ‘attribution rules’. And to put the cherry on top, if you enjoy income-tested benefits like Child Canada Tax Benefits, these are entirely unaffected by any and all gains or withdrawals on the TFSA.
Opening an account is not difficult at all. All you need is a piece of identification, to be a Canadian citizen over the age of 18 years old, and perhaps 15 – 30 minutes of your time. Although it is better to open an account where you do your regular banking – simply because they will have a better understanding of your credit history, your savings and spending patterns, and other such information – you are free to open an account anywhere you want and with any starting amount.
You may, if you wish, open more than one TFSA, but your total limit will still be $5000, so make sure you keep track of your contributions to each account so as not to go over the limit. It is also important that you do some homework and find out which institutions offer the best interest rates on returns.
Tax Free Savings Accounts have been available to Canadians since January 2009, and as such are still not very popular. About four million Canadians hold such an account, with approximately $12 billion in assets, but seeing as how there are very few deterrents to opening one, it is expected that these numbers will soon grow.
Particularly for young professionals looking to practice a little responsibility by investing for the future after many wonderful years of keggers and care-free spending (and a lot of studying too of course), the account is a very practical option. With a steady paycheck and a little frugality and commitment to contributing to the account, a young professional can easily turn small monthly contributions into healthy gains for the future or for whatever needs may arise in the present.
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