Opinion

D Smith: Changes in 2013 for the Tax Free Savings Account

Starting in January 2013, you can put an extra $500 in a Tax Free Savings Account to top up your 2013 annual $5,000 contribution.

The limit has been increased by the federal finance department due to the increase in the cost of living.

Since the TFSA was introduced in 2009, Canadians have been able to earn tax free investment income on contributions of $5,000 per year.

As of Jan. 1, 2013, the total amount allowed is $25,500.

TFSAs are a popular investment product used by many Canadians.

The tax free savings accounts are useful for saving for your first home, a vacation, an emergency fund or investing purposes.

Should you contribute to your TFSA? The answer depends on your own personal situation.

Your cash flow, your personal debt and your current and future tax rate should affect your decision. Many Canadians should pay down debt instead of contributing to a TFSA.

The debt category includes credit card debt, student debt, consumer debt or mortgage debt.

Ensure you receive independent advice on the choice of contributing to your TFSA or paying down personal debt.

If a bank or credit union holds your mortgage, they earn money on your mortgage debt.

They may also encourage you to purchase a TFSA from them.

Both the mortgage and TFSA are profit centres for them and they may encourage you to purchase a TFSA to “double dip” instead of encouraging you to pay additional payments on your mortgage.

Many Canadians don’t know what they hold in their TFSA.

TFSAs are promoted from bank employees at financial institutions offering low paying interest accounts.

This may not be in your best interest. However, it may be in their best interest.

Many Canadians think the words Tax Free Savings Account mean a savings account or a low paying GIC as the only type of investment allowed.

A TFSA allows you to invest in multiple types of investments; savings accounts (many earning one per cent), mutual funds, stocks, bonds or other types of qualified investment products.

Tax rates vary on different types of investments.

In a regular non registered account, capital gains receive the most preferred tax treatment, followed by eligible dividends and then non eligible dividends.

Interest income is the least efficient income—meaning every $1 of interest income is taxed at a higher tax rate than capital gains or dividends.

Focus on taxation when purchasing your TFSA because eliminating taxation is the #1 reason for the TFSA.

Funds available in your TFSA can be withdrawn tax-free at any time.

You can re-contribute withdrawn amounts in the same year only if you have unused TFSA room.

Otherwise, you have to wait until the following year.

Income earned in a TFSA and any withdrawals do not affect your eligibility for federal income tested benefits or credits.

TFSAs can be transferred using a government form to a TFSA of your choice.

If you parked your TFSA in a savings account earning minimal interest of two per cent, you can transfer to a dividend or growth style of investment using the government form.

Review your personal asset allocation, longevity and current cash flow.

Receive independent objective advice and choose your TFSA wisely.

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