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Canadians Get Tax-Free Savings Account (TFSA) in 2008 Budget

The new Tax-Free Savings Account (TFSA), revealed in the Conservative 2008 Budget starts in 2009 and gives Canadians aged 18 and older tax free contribution room of up to $5,000 annually (from their taxable income). The investment income, including capital gains, earned in a TFSA will not be taxed — even when withdrawn.

The plan also allows an investor to withdraw funds from the TFSA at any time and for any purpose. The withdrawal amount can then be put back at a later date without reducing contribution room for that year. Unused room can be carried forward to future years.

TFSA Good For Retirees

Not that individuals couldn’t have parked their cash before, but the taxation incurred upon withdrawal may make people (especially retirees) adopt the TFSA as a legitimate money parking tool. 65+ will benefit because they will be able save funds once their age restricts them from contributing to an RRSP.

This definitley bodes well for those looking to retire in 5 years and need to start putting some tax free money in low risk investment vehicles. An individual contributing $200 a month to a TFSA for 20 years, at a 5.5 per cent rate of return, will earn about $11,045 more in savings than if the investment had been made in a taxable savings vehicle (unregistered account).

Income or capital gains earned in a TFSA will also not affect eligibility for federal income-tested benefits such as the Guaranteed Income Supplement for low income seniors. The same applies to withdrawals from a TFSA account.

For example, a modest or low-income retired couple, earning $2,000 a year in interest income on an unregistered basis, would see their GIS benefits reduced by $1,000. If the interest was being earned in a TFSA account, there would be no reduction to their GIS.

Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA, says the 2008 Budget.

The budget estimates that the introduction of TFSAs will reduce federal revenues by $5 million in 2008-09 and $50 million in 2009-10. By 2012-13, the estimated tax savings from TFSAs will be $385 million. Over the next 20 years, the annual tax savings is estimated to grow to over $3 billion annually.

However, if you’re young then there’s no point opting for a 5.5% investment tool when you should be looking at higher risk but higher return over longer periods of time (RRSP’s in say equity funds.)

How the Tax-Free Savings Account Will Work

* Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
* Contributions will not be deductible.
* Capital gains and other investment income earned in a TFSA will not be taxed.
* Withdrawals will be tax-free.
* Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
* Withdrawals will create contribution room for future savings.
* Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
* Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
* The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

[tags]tfsa, budget, 2008 budget[/tags]

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