There is a lot of confusion about Tax Free Savings Account or TFSA. The situation is borne out by the wrong notion of people about the “saving account.” While it is true that you can maintain a savings account with the TFSA, you can also utilize the TFSA to purchase stocks, bonds, mutual funds and GICs. The TFSA is basically a shell that is similar to RRSP, as both instruments present opportunities for investment growth tax free.
Here are the essential features of TFSA:
1. Any Canadian citizen, 18 years of age or older, is qualified to make an investment up to a maximum of $5,000 annually.
2. No taxes will be levied on any gains and this will include capital gains.
3. There are no withdrawal limitation for the money deposited in TFSA
4. Any amount of money that is withdrawn from the TFSA can be re-deposited after a certain period of time and will not have any effect on the contribution room.
5. Any used portion of the contribution room for a particular year can be forwarded and credited to the succeeding year.
6. TFSA has no lifetime contribution cap
7. Assets from the TFSA account of a deceased spouse can be transferred to the surviving spouse tax free.
Financial experts are seeing the upsides of TFSA. This plan comes as a welcome breather for Canadians amid the declining and low interest rates. Its attractive tax exemption feature is considered as the clincher for this plan. However, there are certain concerns that you must be aware of when considering TFSAs. The contribution cap of $5,000 and the fees that will be charged are the two major concerns by most financial managers and investors.
That being said, there are basic differences between TSFA and RRSP. The main difference is on the time you can infuse funds and the time you can take them out. Under the general guidelines of RRSP, you are entitled to a tax refund once you infuse funds in the plan while withdrawal at retirement will be levied with the appropriate tax. On the other hand, you are not entitled to any refund when you infuse funds on TFSA, but you will also don’t have to pay any tax upon withdrawal. In addition to this, your withdrawal will not have any effect on your contribution room and you can make another deposit in the following year.
During its first year, you may opt for a high yielding savings account in your TFSA which can serve as your emergency fund. But you have to remember that this is not the best option if you are looking at TFSA as a viable tax strategy. It would be better for you to opt for high earning investment instruments in your TFSA since you will not have to pay taxes. Using the same decision parameter, it is better for you to place low earning investment instruments such as GICs and bonds into RRSPs. You will end up getting the same amount of refund for the funds that you infuse. And when you finally withdraw your money upon retirement, the amount of tax that you have to pay will not be as much as that with REITs or stocks.
Another great thing about TFSA is that you can use this as your income tax shelter. If you are going to purchase income trusts such as REITs in your TFSAs, you can withdraw the returns as a tax-free continual income. If you are planning to push your limit then it is wise for you to incorporate stocks since these investment instruments are considered tax efficient and are your best pick outside of TFSAs and RRSPs.
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Article Source: EzineArticles.com/expert/Laurel_R._Lindsay/430470
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