By Scott Ronalds

Starting this year, a new savings vehicle will be available to all eligible Canadians who are at least 18 years old.  Tax-Free Savings Accounts (TFSAs) will enable individuals to invest money in a tax-free structure throughout their lifetimes.

Contributions to TFSAs will not be tax deductible (as they are for RRSPs), but any income and capital gains earned within the accounts will be exempt from tax, and withdrawals will be tax-free.

Within a TFSA, investors will be permitted to hold the same types of investments they can hold in other registered accounts (such as RRSPs).  For example, mutual funds, individual stocks and bonds, and GICs are all considered eligible investments.

For 2009, the contribution limit is set at $5,000 per year.  In subsequent years, the limit will be indexed to inflation (rounded to the nearest $500).  Similar to RRSPs, unused contribution room can be carried forward.  For example, if you contribute $1,000 to an account in 2009, you would be eligible to contribute up to $9,000 in 2010 ($4,000 carried forward from 2009 plus the 2010 contribution limit of $5,000).  Further, if you withdraw money from a TFSA, the amount will be added back to your contribution limit the following year.

Importantly, neither income earned nor funds withdrawn from a TFSA will affect government benefits that are based on your income, such as Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).

For more on the basics of TFSAs, we recommend checking out Canada Revenue Agency’s (CRA) information brochure.

This new vehicle is a winning tool for investors.  Indeed, every eligible Canadian should open an account.  They represent a great structure for tax-free saving, and offer greater flexibility than the existing options (e.g., RRSPs, RRIFs, etc.).

However, as we noted in a blog early last year, TFSAs lack the ‘forced’ savings discipline of RRSPs (because of the latter’s up-front tax deduction and early withdrawal penalties), and investors who turn to these vehicles as their primary source of retirement savings must therefore be careful not to tap into the accounts too often.

Steadyhand will offer TFSAs to existing clients starting today.  Investors who do not have an existing relationship with Steadyhand must open an investment or RRSP account that meets our minimum requirements prior to opening a TFSA.  The minimum deposit for a TFSA is $5,000 per fund.  The new accounts will be grouped with existing accounts for fee rebate and reporting purposes.  In other words, you will be able to view your TFSA account details in the secure portion of steadyhand.com, and you will receive fee rebates (if applicable) on assets held within the account. 

The TFSA application form is available on the Forms & Documents page of steadyhand.com.  If you have any questions on how to open an account, or if you want to discuss how to best incorporate a TFSA into your investment plan, feel free to give us a call at 1-888-888-3147.