Tax-Free Savings Accounts were introduced in January 2009 as a new way to save money. Contribution limits for qualified Canadians are up to $5,000 per year without being taxed on investment income or capital gains.
Here's how they work:
• Contribute up to $5,000 per year tax-free
• You are not required to have earned income to contribute
• Withdraw money for any reason – without being taxed
• Choose from a variety of investment options: Segregated Funds, GICs and Savings Deposits
• You don't lose the contribution room if you make a withdrawal, but you do need to wait until the next year to re-contribute the money
• You can provide funds to your spouse for him or her to contribute to a Tax-Free Savings Account without being subjected to income attribution rules
• If you don't contribute the maximum amount, you can carry forward your unused contribution room indefinitely. For example, if you contribute $2,500 to your TFSA in 2009, your contribution room for 2010 will be $7,500 ($2,500 carried forward from 2009 plus $5,000 for 2010).
The Tax-Free Savings Account is a great new tax-sheltered account and it can help you achieve your investment goals. However, it all depends on your personal goals and situation. As an example, if you've used your RRSP contribution room or cannot make RRSP contributions, the TFSA could be the right solution. Another great investment planning opportunity is to potentially use your TFSA for income splitting with your spouse.
TFSA - Tax Free Savings Account