Canadian residents, age 18 and over, have a new incentive to save money, without having to pay tax on the interest it earns. The tax-free savings account (TFSA) allows you to contribute up to $5,000 annually, with $500 increments indexed to inflation. The money you contribute is not tax-deductible, but the income earned from any capital gains, interest, dividends, or other investment income within these accounts will be tax-free.
In addition, the savings account will allow you to:
Financial institutions currently issuing RRSPs are also able to issue TFSAs. TFSAs differ from RRSPs in that tax benefits on RRSPs usually prevent the withdrawing of money until retirement. TFSAs, with $5,000 annual contribution limit, will not allow you to save enough for retirement. If you expect that your tax rate will be lower when you retire, RRSPs will actually be more beneficial in the long-term.
In regards to using your RRSPs toward the Home Buyers' Plan (HBP), which is designed to assist first-time homebuyers with a means of acquiring cash for a down payment, the new tax-free account does present some advantages, especially to those saving toward a second property.
Below is a comparison table between the RRSP HBP and the new tax-free savings account:
| RRSP Home Buyers Plan | Tax-free Savings Account | |
|---|---|---|
| Availability | First-time buyers | Everyone |
| Money Taxed | Upon withdrawal from RRSP1 | Before depositing into TFSA |
| Tax Deductible Deposits | Yes | No |
| Withdrawals | Must be paid back | No Need to Repay |
| Maximum Annual Deposit (for 2008) | $20,000 (max. 19% of your income) | $5,000 |
| Maximum Withdrawal | $20,000 | Unlimited |
Because they allow the flexibility of tax-free withdrawals, re-contribution at any time, and accrue tax-free interest, TFSAs are ideal to use to save up for a large purchase such as an overseas vacation, tuition fees or a down payment on a home. For example: Contributing $200 per month to a TFSA over 20 years will accumulate about $11,045, more than submitting the same contributions would amount to in an unregistered account.
Notes: Combined federal-provincial tax savings, based on a $200 monthly contribution for 20 years and a 5.5 per cent rate of return. For unregistered savings, a 21 per cent average tax rate on investment income is assumed (based on 40 per cent interest, 30 per cent dividends and 30 per cent capital gains, and a middle-income earning account holder).
Source: Department of Finance Canada
If you want to take advantage of the tax-free savings account, but currently lack access to the funds to contribute to one, consider refinancing your mortgage. CanEquity offers the lowest interest rates* available. With one of our many fixed rate mortgage products, you could save close to one year's TFSA contribution limit, and begin amassing tax-free earnings.
| Mortgage Term | Our Mortgage Rate* | Bank Posted Rate** | Saving Per Year 2 |
|---|---|---|---|
| 1 year | 2.89 % | 3.50 % | $1,847.13 |
| 3 years | 2.79 % | 4.05 % | $3,756.62 |
| 5 years | 3.25 % | 5.29 % | $6,023.18 |
| 10 years | 3.89 % | 6.75 % | $8,242.08 |
