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Tuesday, January 6, 2009

Open a Tax-Free Savings Account! -- Part 1

Alright, people...It's time! Go out and get a Tax Free Savings Account. Now! Go Go Go...

If you're 18 or over, a Canadian resident can invest $5000 each year in the account and allow its holdings to grow tax free. Keep in mind, each year...so the first year you have $5000...next year, you have $10,000...the year after, you have $15,000... and so on.

While there is no upfront tax reduction for putting money into a TFSA, your investments won't be taxed, so this means your capital gains, dividend yields and interest income are protected. However, it also means your capital losses can't be written off. Furthermore, you won't be taxed when withdrawing your money from the account, and there is no requirement to make withdrawals by a certain age.

Now, I've been telling friends and family informally to sign up for one, and the general retort goes something like this: "The most a high-income taxpayer in Ontario would save on a $5000 deposit is $115 in tax if he or she earned a 5% interest rate. Who cares about a measly $115?"

Yes, this is not an overwhelming amount of money...But, assuming $115 means nothing to you, you need to think long-term. If the maximum contributed for 10 years, assuming no growth and a 5% return, no taxes are due on $2500 of investment income, which means $1150 for that year! And it continues to the next year ($1265)...and the next year (you get the point)...absolutely marvelous!

Now, you might not have a need as you may not have savings or investments. However, your parents or your spouse might, and there's nothing saying they can't use your room. Additionally, the contribution room won't go away, so it won't hurt to at least have an account (provided they don't charge you annual fees).

People, People, People...You're looking at the greatest savings vehicle since the RRSP. Don't ignore a great thing!

Which Tax Free Savings Account is the best? Stay tuned for our next post!

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