Who wants to pay tax when you don't have to, right?
I know I certainly do not so as soon as the clock struck midnight on December 31 I sent a message to my administrators asking them to transfer $5,000 from my non-registered accounts to my Tax-Free Savings Account (TFSA).
I really do not like the name the government gave to this tax-free haven as it's title often misrepresents the benefits. It's not a savings account, per se. It can be an investment account so that you can put any stocks, bonds or mutual funds into your TFSA and any interest income, dividends and capital gains you receive are not subject to tax! Calling it a 'savings account' has led clients to believe that you have to put the funds in a 'savings account' at the bank earning today's low rate of interest rather than use a more effective investment strategy and they tend to dismiss this strategy all together. What a missed opportunity!!!
What's even better is that if you have come into a windfall in 2011 and have not been contributing over the past 3 years you can catch up and put in $15,000 all at once! The rules are that you can contribute $5,000 per year from 2009. Unlike a RRSP you will not receive a tax deduction for your contribution but when you take the money out it isn't taxable income either (which it would be if you took it out of an RRSP). You can also replace the money you took out. Let's look at this example.
Let's say in 2009 I put in the allowable $5,000 and then again in 2010 so now I have $10,000 in the TFSA (I'm not going to add any returns for the purpose of this example). I decide I want to go on a vacation and take the money out so I take out the whole $10,000. In 2011, I win the lottery and I can put in $15,000! That would be the $5,000 amounts I am replacing for the 2009 and 2010 tax years as well as the new contribution for 2011.
Sometimes it is more important to use the TFSA for a savings vehicle rather than contributing to a RRSP!!! It can also be used as a tool for income splitting. If you want further information or clarification please feel free to comment or contact me @ kjankowski@tewealth.
