TFSAs

Six Reasons to Contribute to The New Tax Free Savings Account (TSFA)

Although the benefits of the TSFA will be small in the short term, the long term benefits can be very significant. And here are 6 reasons why.

1. It makes good sense to open up a TSFA even if you do not make an immediate contribution to it. When you open an account your contribution room will be allowed to accumulate and if you have the money at a later date you will have the room to move it into the account. As an example, if you opened up a plan but did not make a contribution for 10 years at that time you would have over $50,000 room to shelter a one time windfall or extra cash that might be available when the mortgage is paid off or the house was sold.

2.The contribution limit is $5,000 per annum regardless of any amounts contributed to an RRSP/RPP. Those individual who have maxed out contributions to their pension plan and their RRSPs can still contribute to the TSFA.

3.Another great feature of the TFSA is that earnings within the account and withdrawals do not affect income-tested benefits such as the Canada Child Tax Benefit or Guaranteed Income Supplement. RRSP withdrawals can result in losing the Guaranteed Income Supplement and impacting the OAS clawback. While the benefits of a RRSP are debatable for low-income earners, the TFSA will provide the tax deferral benefits of a RRSP without any of the drawbacks.

4.The $5,000 limit is indexed to the CPI and will increase in multiples of $500. For example, if inflation goes up by 3% a year, after 10 years inflation will be 34% higher and the annual contribution by that time will have grown to $6,500.

5.Amounts can be withdrawn at any time and any amounts withdrawn can be subsequently re-contributed. For example lets suppose that the TSFA grew to $30,000. You could withdraw it , and then you will have $30,000 contribution room that you can put back into the plan in the future.

6. Over the years for an individual contributing to a TSFA with a combination of rising contribution level, and tax free compounding on the assets can build up sizable TSFA that can then be withdrawn with no taxes to be paid. If we assume an 8% return and 3% inflation rate and maximum contribution, after 10 years the annual contribution will then be $6,500 and the size of the TSFA will be $98,000. After 20 years, the annual contribution room is now $9,000 and the amount in the plan is $330,000. The $330,000 is earning income tax free. The full amount could be taken out or any partial amount could be taken out with no tax penalty.

Extracted from Second Opinion.