The TFSA is Perfect for Emergency Funds
Posted by Gail | Filed under When Ca-Ca Happens
As we round out of 2008 and into 2009 the newest new thing is the Tax Free Savings Account. The TFSA was announced at the beginning of 2008 for release in 2009, but some FIs have been quick off the mark in introducing the product.
Canadian residents 18 and older can save up to $5,000 every year in a TFSA. You can have as many TFSAs as you wish, but the $5K contribution limit applies across all accounts.
While the contributions aren’t tax deductible, all the income earned in a TFSA is tax-free. If you can’t save $5,000 this year, don’t sweat it. Your contribution room can be carried forward to future years. So if you can only stick $2K in for 2009, in 2010 your limit will be $8,000 ($5K for 2010 and $3K carried forward from 2009.) And, by the way, those limits are going to be indexed to inflation in $500 increments, so watch for increases in limits over time.
The bestest thing about the TFSA is its flexibility. You can take money out of your TFSA at any time for any purpose, without losing the contribution room, which makes this account the number one choice for socking away an emergency fund. So even if you take money out in one year, you can put it back the next, without affecting that year’s $5,000 contribution limit.
Since neither the income earned or withdrawals from a TFSA affect a body’s eligibility for federal income-tested benefits and credits, the TFSA may become a great way for lower-income Canadians to set something extra aside for retirement without having to worry about how it’ll impact on their government benefits.
People saving to buy a home will also love the TFSA since it never has to be repaid, and you can re-use the contribution room for something else once you’ve accomplished your home-buying dream. And people looking for a way to income-split will love the TFSA because a higher-income spouse can contribute to the TFSA of a lower-income or stay-at-home spouse, without the income earned by attributable back to the higher-income spouse.
The TFSA is also the perfect place to park that money you’re eventually going to use to buy a new car, repaint your house, or go on a splendid vacation… any kind of planned spending for a big-ticket item.
You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments. Why? Well since all the capital gains inside TFSA is tax free, it also means any capital loss can’t be claimed to be offset your other capital gains.
The big thing to watch for is the fees levied by the FIs offering the new TFSA. Don’t be so blinded by the tax-free income that you buy your account from some provider who then gouges you with admin and withdrawal fees. They’ll try. It’s up to you to make sure they don’t succeed on your back.