"Real Estate Bits - 2"

Canadians know the importance of saving for retirement in a Registered Retirement Savings Plan (RRSP). This powerful financial tool allows you to benefit from compound tax-deferred savings growth. Now, with the introduction in January of 2009 of the Tax-Free Savings Account (TFSA), Canadians have another powerful savings vehicle to choose from.

Benefits of a TFSA

A TFSA lets you invest in mutual funds, stocks, bonds, GICs, and high-interest savings products, just like an RRSP. All interest, dividends, and capital gains earned in your account are tax-free, and you can withdraw your savings at any time and for any reason without paying tax. You are allowed to contribute up to $5,000 to your TFSA in 2009. The TFSA contribution limit will be indexed to inflation in later years. As with an RRRSP, unused contribution room is carried forward.

Match Your Savings To Your Goals

So, how do you choose between these two great savings vehicles? That depends on what you are saving for. If it’s retirement, an RRSP may be the better option, since it’s meant to encourage long-term growth by taxing withdrawals. But there are other goals for which a TFSA might be better suited.

An emergency fund. A TFSA is the perfect choice for a “rainy day” fund, particularly if you choose to save in a high-interest account or short-term GIC. That way, the money is more accessible and the interest you earn is tax-free. Life goals. A TFSA is also an ideal way to save for a home, car, dream vacation, or any short- or longer-term goals. In retirement. If you are enjoying your retirement years, you can use a TFSA to earn tax-free income on your investments without affecting your federal government benefits. A TFSA is also the ideal place to deposit surplus RRIF or pension income.

Why Not Both?

Since we all have short-term and long-term savings goals, both of these savings vehicles can be used in tandem. RRSP contributions are tax-deductible and contribution limits are much higher, but withdrawals are taxable. The TFSA gives you the flexibility of making withdrawals at any time, but keep in mind that contributions are not tax deductible.

Maximum Flexibility

One of the many great features of the TSFA is its flexibility. It's a savings tool that can be used to build an emergency fund, a vacation fund, continuing education, to supplement your retirement savings - indeed for any short- or long-term goal you choose. The TFSA's flexibility extends to any withdrawals. You can withdraw any amount from your account for whatever purpose, and none of the money earned in, or withdrawn from, your TFSA is taxable. What's more, any amounts you take out are added to your contribution room for the following year. So let's say you contribute $5,000 in 2009 and then withdraw $2,000 in 2010. Your contribution room for 2011 would be $5,000 + $2,000 for a total of $7,000. The flexibility of the TFSA also extends to your choice of investments. Tax-Free Savings Accounts can hold a wide range of investments, including cash, Guaranteed Investment Certificates (GICs), mutual funds, stocks, and bonds. Any investment that you can hold in your RRSP can be held in your TFSA.

The TFSA can also be used to split income. For instance, you can contribute to a spouse's or adult child's TFSA, and the investment income earned is not attributed back to you. The TFSA came into effect in January 2009. If you haven't taken the time to review your savings and investment plan in a while, this is a good time to do so. Speak to your financial advisor about the best way to take advantage of this important new savings tool.

Regards,

Nino Pasquariello

Tricks Of The Trade: