If the proposed 2008 federal budget is passed, Canadian residents aged 18 and over will have a new incentive to save money in 2009. It’s not easy to save money and for those who have, it’s discouraging to have to pay tax on the income that it earns.
With the new tax free savings account (TFSA), contributions up to $5000 annually, with $500 increments indexed to inflation, will not be deductible but the income earned from any capital gains and other investment income in these accounts will be tax free. In addition, the savings account will allow you to:
Financial institutions that currently issue RRSPs will be able to issue TFSAs. In terms of saving for the future, TFSAs differ from RRSPs in that tax withdrawals on RRSPs usually prevent withdrawing money until retirement. TFSAs, with $5000 annual contribution limit will not allow people to save enough for retirement. Also, if you expect your tax rate to be lower when you retire, RRSPs will actually be more beneficial in the long term.
In regards to the RRSP 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 who may be saving for a second property.
Below is a comparison table between the RRSP HBP and the new Tax-free Saving 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 |
TFSAs, because of their flexibility in terms of tax free withdrawals, and tax free interest, are appealing for saving up for that big purchase such as an overseas vacation, tuition fees or a down payment on a home. For example, a contribution of $200 a month to a TFSA for 20 years will accumulate about $11,045 more than 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 new Tax-free Savings Account but don’t have extra money to put into one, consider refinancing your mortgage. CanEquity offers new lower interest rates* that can save you close to one year’s TFSA contribution limit with many of our fixed rate mortgage products.
| Mortgage Term | Our Mortgage Rate* | Bank Posted Rate** | Saving Per Year 2 |
|---|---|---|---|
| 1 year | 5.10 % | 6.15 % | $3,062.68 |
| 3 years | 5.50 % | 6.15 % | $1,887.93 |
| 5 years | 5.45 % | 6.65 % | $3,468.99 |
| 10 years | 6.20 % | 7.45 % | $3,567.13 |
The money you save by refinancing your mortgage with CanEquity could earn you tax free income when you contribute to a TFSA.
TFSAs offer flexibility by allowing savings to accumulate without taxes on interest, dividends and capital gains and by tax free withdrawing and re-contribution at anytime and for any reason.
The tax-free savings account is a great motivation to start saving. By contributing every month to a TFSA you can accumulate enough for those major life purchases such as a car or a down payment on a home and still have more money than if you save in an unregistered account.
Note: Amounts expressed in constant dollars and investments assumed to earn a real rate of return of 3.5 per cent (5.5 per cent nominal minus 2 per cent inflation). Tax Savings calculated using an average combined federal-prvincial tax rate of 21 per cent on investment income, consistent with middle-income earner investing in a balanced portfolio (40 per cent interest, 30 per cent dividends and 30 per cent capital gains).
Source: Department of Finance Canada