Because the TFSA is a tax-free savings vehicle, there is much confusion over its differences with the RRSP. The situation is not helped by the fact that both accounts can hold the same types of investments, such as guaranteed investment certificates, mutual funds and term deposits. However, a TFSA works quite differently from an RRSP: while RRSP withdrawals are taxable, withdrawals from a TFSA may be made at any time and are not subject to income tax. This is why a TFSA is an excellent way to save for
short- and medium-term projects, such as buying a home or travelling. However, unlike RRSPs, TFSA contributions are not tax deductible.
Some people may benefit from using a TFSA as a source of retirement income. This is because neither the income generated in a TFSA, nor any withdrawals you make influence the amounts of your benefits and income-based tax credits, such as Old Age Security benefits and the Guaranteed Income Supplement. In addition, individuals who have used all the contribution room in their RRSP can deposit additional amounts in their TFSA to generate tax-free retirement income.
Since its inception, as much as $5,000 per year can be invested in a TFSA, and unused contributions can be carried over to the following years. This represents an opportunity to contribute up to $20,000 if you have never contributed to a TFSA! It should also be noted that each withdrawal from a TFSA creates new contribution room in the same amount for the following year. For example, if you withdrew $500 from your TFSA in 2011, you can contribute an extra $500 in 2012, above and beyond your $5,000 in basic contribution room and unused contribution room for previous years.
There are many advantages to having a TFSA. However, it is not always easy to choose the right investments to be included in it. We can help you with this selection, so do not hesitate to contact an advisor, who can help you develop a strategy that is tailored to your needs.