D. Smith: Save on taxes by starting a Tax Free Savings Account

ATax Free Savings Account is an account allowing Canadians to accumulate investment assets tax-free

You can hold assets such as savings, Guaranteed Investment Certificates, mutual funds, stocks  and segregated funds.

The TFSA has now grown to an available contribution room of $31,000 effective Jan 1, 2014. The current annual contribution amount is $5,500.

The TFSA should be considered as part of your financial plan.

It can be a very effective tax strategy now and in retirement.

Many Canadians don’t really know all the important components of a TFSA.

One of the main reasons is the word “savings account” results in people stock piling their annual contributions into a savings account paying one per cent at a local bank or credit union.

Don’t make the bank any richer by parking your hard earned money in a one per cent account.

Perhaps you started out in a savings account or a GIC account.

You can transfer this to a growth type of investment and not trigger any taxation.

A TFSA transfer between financial institutions is processed using a government transfer from completed by your financial advisor.

You can switch TFSA investments and financial institutions.

It is important to review your asset allocation, current and future cash flow and how long your money will be in a TFSA to help make the decision of what type of investment is the best for you.

TFSAs can be used as a short-term parking spot; as a savings vehicle for a soon to be purchase; in a dividend paying or growth mutual fund, or in a stock. The choice is yours.

Taxation in a TFSA is non-existent. Interest income, dividend income or capital gains earned in a TFSA is not included in your taxable income.

Future withdrawals do not incur taxable income.

Estate planning can be used effectively in a TFSA by allowing a named beneficiary.

You can name your beneficiary of choice and they receive the funds without probate or taxation.

You can name an individual other than a spouse to bypass probate.

Compare this to an individually held cash account or non-registered investment, which triggers probate and legal costs upon the passing of the account holder.

Where have you parked or invested your TFSA?

I have not parked my TFSA in a low paying savings account making money for a bank or credit union.

My choice was a growth type of TFSA investment.

It is important to review your asset allocation, current and future cash flow and how long your money will be in a TFSA and then make the decision of what type of investment is the best for you.

Choosing a TFSA or a RRSP or both should be done as part of a financial review.

A general guideline is when our tax rate is higher now than in retirement, a RRSP might be the most efficient tax strategy.

If our tax rate is the same now as in retirement, a TFSA will allow us to have tax free income in retirement.

Using a combination of RRSP and TFSA will result in maximizing tax efficiency now and in retirement.

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