About TFSA

Purpose of this site:

As a young person who is actively involved in financial management, the concept of the tax free savings account got me excited and so I wanted to create a resourceful site to help educate people about it. At the same time, there will be a multitude of financial institutions who will be offering these accounts and so this site can serve as a way for people to share their opinions about each provider.

As well, most Canadians say that while the novelty of a TFSA is great, you need to have money in the first place to put in it. Therefore, another goal for this site is that I am hoping to also find ways to generate additional money to put into this account such as sponsorships or being a little entrepreneurial. Please keep in mind that this information is coming from a regular person as I am not a financial adviser.

What is a tax free savings account?

Starting in 2009, Canadians 18 years of age or older will have the option to contribute up to $5,000 per year in what is being called a Tax-Free Savings Account (or TFSA). Investing your money in this account will not only yield a good interest rate, but what makes this account special is that you can withdraw money from it without the fear of having to pay taxes as with most traditional forms of saving investment plans.

My Attempt Using A Longwinded Explanation:

Whenever we earn an income we have to report it every year to the government and pay taxes on it. For example, let’s pretend one person makes $30,000 a year from a job and has to pay 30% in income taxes. This means that one would pay $9000 that year in income tax leaving them with $21,000.

Now maybe something came up during the year and the person realizes that they need to pull out money from an investment such as a GIC that matured. We’ll say the person invested $1000 initially and in the end the person earned 5% interest meaning now they would get $1050.

But hold on. By pulling that money out it now qualifies as income and is subject to taxes as well. Therefore, it will be added to the person’s annual income to make it $31,050. Minus that by 30% and that means the person now has to pay $9315 in taxes.

The same thing will hold true if you simply earn interest from a bank through a traditional savings account where the money you earn is subject to taxes as it needs to be reported as part of your annual income.

Are there any drawbacks to this account plan?

Normally when you invest in an item such as a registered retirements savings plan (or RRSP) you can claim the amount you invested against your yearly income. For example, if you made $30,000 and invested $2000 then your yearly taxable income would be $28,000. However, placing money into a tax free savings account won’t provide you that same benefit.