The Canadian government recently announced a new type of tax-free savings account (TFSA) available to Canadians which is similar to the Roth IRA account available to Americans. Here are some of the details:
What is the TFSA?
A type of account where you make contributions but don’t get any income tax refund. While the money is in the account there are no taxes applied to any kind of earnings such as interest, dividends, capitals gains. Any withdrawals from the account are not taxable and won’t count against any government programs ie GIS, OAS.
How does the TFSA work?
- You can contribute $5000 per year to this account for the years 2009 to 2012 and $5,500 for year 2013 and beyond.
- The contribution room is carried forward.
- No taxes on any earnings.
- No taxes on any withdrawals.
- When you withdraw money from the account, the contribution room available gets increased by the amount of the withdrawal – please note that this new contribution room is not available until the following calendar year.
When can I open up a TFSA account?
January 2, 2009 was the first day you could deposit funds into a TFSA. Most institutions allowed customers to set up accounts prior to this date however.
Why do I want to open a TFSA account?
Any money that you might be saving for emergencies or upcoming large purchases will have a constant tax drag in an non-registered account. With the TFSA, this tax drag no longer exists so you will end up with more money for your purchase or emergency. Here are some more benefits of the Canadian tax free savings account.