TAX FREE SAVING PLAN
In 2009 government of Canada allow Canadian to open new account which we call Tax Free Saving Account (TFSA). A TFSA essentially allow the individual to invest up to 5000 per year. No tax will be levied on capital gain or income on these investments as long as they remain in the plan.
On the other hand individual can withdraw including original contribution and has no tax obligations on earnings. A TFSA is similar to RRSP but client can’t take tax deductions on the contribution. One may open an account upon reaching 18 years of age. Contribution may be made to a TFSA of up to 5000 in 2009 and another 5000 in each subsequent year. TFSA contribution room begins to accumulate in 2009 except that no contribution room can begin to accumulate until the year in which plan holder turns to 18 years of age.
Unused contribution room accumulates every year. Plan holder can open many accounts as long as he is not making over contributions.
How the Tax-Free Savings Account Works
- As of January 1st, 2013, Canadian residents, age 18 and older, can contribute up to $5,500 annually to a TFSA.
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Unused TFSA contributions 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,segregated funds, Guaranteed Investment Certificates and bonds.
- Contributions are not tax-deductible.
- 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.
TFSA VS RRSP
| TFSA | RRSP | |
| New contribution room each year | $5,500 (2013) ($5,000 for the years 2009 to 2012) | 18% of previous year’s earned income, less any pension adjustments, up to the maximum RRSP contribution limit for the year. |
| Carry-forward of unused contributions | Unused contribution room carried forward indefinitely | Unused contribution room carried forward until the year in which you turn 71 years old. |
| Need earned income to contribute? | No | Yes |
| Ability to make contributions | No maximum age (minimum 18) | Until the end of the year in which you turn 71 years old. |
| Are contributions tax-deductible? | No | Yes |
| Do savings grow tax-free|? | Tax-free | Tax-deferred |
| Tax implications of withdrawals | Withdrawals are tax-free | Withdrawals are added to your taxable income in the same year the funds are withdrawn. |
| Do withdrawals affects contribution room? | Amount of withdrawals are added to contribution room starting the following calendar year. | No, as contributions are based on previous year’s earned income |
| Do withdrawals affect government benefits? | No | Yes |
| Are there over-contribution penalty tax? | Yes; excess contributions subject to a penalty tax of 1% per month. | Yes; excess contributions are subject to a penalty tax of 1% per month. Penalty tax only applies if you exceed the $2,000 lifetime over-contribution amount |
| Am I required to convert my plan at a certain age? | No | Yes — must convert an RRSP to RRIF or an Annuity. |
Sahib Insurance Advisor will help you to set up your account.
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