Learning About Finances: Tax-Free Savings Accounts (TFSA)

March 7, 2010 by vongsundara · 2520Leave a Comment2010-03-08+04%3A21%3A54vongsundara

I think it’s always important to constantly be challenging your mind to learning. I always find myself reading up on new topics or listening to audio tapes on my iPod while working on other projects. Recently I’ve been focusing my efforts on learning about finances.

You see, I grew up in the ghettos of Winnipeg, and there is a much different mentality surrounding finances in poorer areas. It wasn’t a topic that was discussed a lot, and it certainly wasn’t an area where a lot of focus was placed. After starting my adult life with a series of terrible financial decisions, I have decided to learn more about how to make sound financial decisions.

The first topic I decided to research was Tax-Free Savings Accounts (TFSA), a new tax shelter introduced by the Canadian government in 2009. It’s been said to be the most significant tax shelter for Canadians since the introduction of Registered Retirement Savings Plans (RRSP) decades ago. Unlike RRSPs (which are defer your taxes until your retirement), TFSAs are completely tax free (not tax deferred).

In other words, get a TFSA right now. There’s really no reason not to get one. Each year you are allowed to contribute up to $5000. If you haven’t contributed at all yet, that means you have $10,000 of space to use in 2010.

You are allowed to withdraw from your TFSA at any time without penalty. Whatever amount you have withdrawn can be recontributed to your TFSA the following year (e.g. if you withdraw $1000 from your TFSA now then you will have an extra $1000 of contribution space in 2011). This feature makes TFSAs perfect for those looking to start an emergency fund or those saving up for a car or a home.

If you are retired then you have extra incentive to open a TFSA as you no longer have access to RRSPs after you retire. Also, money withdrawn is not counted as income.

A really important point about TFSAs are that they don’t have to be used for savings accounts at all. You can have your TFSA as your investing account. Just think about that, tax-free investing for up to $5000 a year. That’s really quite amazing for first-time investors looking to get their feet wet.

Please note that I am no financial expert, I’m just sharing the information that I am learning along the way as someone who used to be terrible at finances and hopes to be amazing before all is said and done. Always check with your financial advisor if you have one.

Also important to note is that you have to be 18 years old and Canadian to open an account. Growth (or loss) earned through investments in the TFSA account have a permanent effect on the contribution amount.