Thursday, October 30, 2008

The Government Did Something Right?

With the recent market upturn, I imagine many people are thinking that "life is returning to normal". I for one, do not aspire to that notion - in fact many people believe that what we are seeing in the markets lately is the "new normal".

How are people reacting to the market ups and downs? A recent survey found most people are still contributing to their RRSP's and only 8% were planning on saving less. This may change slightly as 2009 brings about the introduction of the Tax Free Savings Account (TFSA). This new product, which you have undoubtedly started to hear about, will alter the way we "save" for our futures. Please note that while this product will benefit most people, the way it should be implemented with vary from person to person, and family to family. Since everyone's situation is different, we will need to consider all the facts before designing a plan.

Jonathan Chevreau described in his National Post column that the TFSA would shake up the investment industry. Ellen Roseman writes in her Toronto Star column that the TFSA will really complement the RRSP. Tim Cestnick made a "comparison" of the benefits in his Globe and Mail column.

So what should you do? Over the next two months I plan to present the product in greater detail and explain how it will benefit people in different ways. Here's a quick example:

A young couple (mid 20's) with one child, who are saving for their first home versus an older "empty nester" couple (mid 50's) with high incomes.

  • The younger couple need an emergency fund, and an account to save money for big ticket purchases. They can also use the account as collateral for borrowing. This could be invested in a high interest savings account.
  • The older couple need a way to save outside of their RRSP's without incurring added taxes. The TFSA offers additional tax sheltered contribution room. They could invest up to $500o each per year (the contribution limit will grow over time), and TFSA's are not subject to "attribution" rules where one spouse earns most or all of the income. They could invest in a range of non-registered mutual funds, trading as often as they wish, and not subject to capital gains taxes, or having to claim dividend or interest income.

Here are a list of the top 10 things to know about the TFSA.

  1. The Tax-Free Savings Account lets you invest while not being taxed on interest or investment earnings.
  2. You can contribute a maximum of $5000 a year. A couple can each contribute $5,000. If you contribute $5,000 each year for 5 years you’d have more than $25,000 earning interest Tax-Free!
  3. You can have more than one Tax-Free Savings Account and you can also have Tax-Free Savings Accounts with more than one financial institution. Like RRSP’s you will need to keep track of how much you’ve contributed so you don’t exceed your limit.
  4. Unlike an RSP, you don’t have to pay any tax on money you take out of your Tax-Free Savings Account, and withdrawals from your Tax-Free Savings Account don’t affect your ability to qualify for Federal benefits like the Child Tax Benefit, Guaranteed Income Supplement, Old Age Security benefits, Age credit, or Goods and Services Tax credit – so you’re not penalized for saving.
  5. You’ll be able to open savings accounts, GIC’s and mutual funds tax-free.
  6. Unlike an RRSP, money you put into your Tax-Free Savings Account will not be deducted from your income on your tax return.
  7. Just like an RRSP, when you file your tax return each year, the government will determine your remaining available Tax-Free Savings Account contribution limit for the coming year.
  8. If you take money out of your Tax-Free Savings Account, you don’t lose the contribution room. You get it back in the following year. If you don’t make the maximum contribution you don’t lose the contribution room. The unused contribution room gets carried over to the following year. There is no limit to how much or how long contribution room can be carried forward.
  9. You can open a Tax-Free Savings Account if you are 18 years of age and a Canadian resident.
  10. The Tax-Free Savings Account comes to Canada January 1, 2009, but we can arrange the paperwork now.

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