<strong>OpenRoad</strong> driver | Trade In by Al Nagy, CFP My FAVouRitE Thing New Tax-Free SaviNgS accouNT I’ve got Julie andrews stuck in my head. actually her song, “my favourite Things” from the sound of music is humming along in my brain as I think of my favourite things when it comes to investing and financial planning. you know the song – “raindrops on roses, and whiskers on kittens…”
I ’m no lyrICal GenIUs, BUt I’m rePlaCInG those words with the following: “saving your dollars, without paying taxes. Planning your future, and growing your net worth…” These are a few of my favourite things. Beginning in January of 2009, Canadians 18 years of age and over will be able to invest without paying taxes, thanks to the new tax free savings account (tfsa) introduced in the february 2008 federal Budget. It is sure to become a preferred strategy because when it comes to financial planning, real innovations that can benefit almost anyone are as common as Julie andrews singing off-key. here’s how it works. If you live in Canada and are at least 18 years of age, you will be able to contribute up to $5,000 per year to a tfsa and then watch it grow without paying tax throughout your lifetime. If you do not plan to contribute right away to a tfsa, no problem. your unused contribution room will accumulate year after year. and what you take out, you can put back in – that’s music to my ears! Presently, if you were to invest in a non-registered savings account, any earned interest, capital gains or dividends are taxable. not so with the tfsa. and that is why it will strike a chord with Canadians who are serious about avoiding tax. The name tax free savings account is a bit misleading as it is actually a plan, and its very nature presents many planning opportunities. eligible investments include mutual funds, money market funds, cash, publicly traded stocks, corporate and government bonds and guaranteed investment certificates. Because the tfsa is targeted to such a wide financial and age demographic, the potential uses make this program very appealing. Consider the various life stages of Canadians and where you might fit in: • YOUNG ADULTS: The tfsa could be used to create an emergency fund equivalent to three months of income. In a tfsa you will not pay tax on the interest income, and withdrawals can be returned to the tfsa without penalty once the “emergency” has been resolved. It could also be used for retirement savings if you are in a low tax bracket where a tax deduction from an rrsP may not seem very valuable. you could put money into the tfsa, let it grow tax free and then transfer it to an rrsP in later years when your income is greater and your tax refund would be larger too. • YOUNG FAMILIES: Parents frequently establish informal trust accounts for the children, hoping to “income-split” on the capital gains, but under the Income tax act, that generally requires that the transfer to the informal trust be “irrevocable,” and that the parents turn the funds over to the child at the age of majority. Using tfsas means that the parent retains full control over the use and timing of any withdrawals. The parent has no obligation to share the funds with the child if the child is not mature enough to receive the funds. In the case of income splitting with spouses, if an individual gifts property to his or her spouse, the first-generation income and the capital gains from the property will attribute back to the first spouse. In contrast, if the individual gifts property to the spouse’s tfsa, there will be no income or gains attributed back. • MIDDLE AGED BABY BOOMERS: There are nine million Canadians in this category, and many of them are in their peak earning years and are maximizing their rrsPs. The tfsa provides another way to save for retirement. 45% of canadians are not yet aware of the plan. • RETIREES: some seniors may receive more money than they need to live on, from their rrsPs, pensions, oas and CPP. Putting the excess amounts into the tfsa will allow them to build up a non-taxable reserve. early retirees may use a tfsa to protect them from the oas clawback. The tfsa would also result in a terrific tax-free inheritance for their children. ‡ The graph below illustrates the difference between investing in a TFSA versus investing the same amount in a taxable non-registered savings account over a five-year period. A one-time investment of $10,000, earning 3.5% annual interest would be worth $782 more in a TFSA than it would in a taxable savings account. After Tax Value of Short Term Savings $12,000 $11,500 $11,000 $11,877 $11,095 TFSA Non-registered <strong>OpenRoad</strong> driver |
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