Tax free earnings

There has been a lot of talk lately about the new Tax Free Savings Account (TFSA) going around. A lot of people have heard about it from the government but not too many people are familiar with it. I’m not too sure about it as well but I have an idea. I tried playing around with some numbers to see how it benefits and at first I didn’t see the point but in the long run, it’ll come in hand.

The TFSA was introduced in the 2008 budget and it hopes to help encourage Canadians to save up. It’s like a retirement savings plan (RSP) but you’re not penalized when you withdraw your money. With an RSP, you’re taxed at least 10% of your withdraw. Unlike an RSP, TFSA are not tax deductible which is a bit of a downer but on the other hand, any interest that you gain on that account is not taxed so you keep all of it.

Any Canadian residents who are 18 or older can contribute up to $5,000 per year to a TFSA. I believe, and correct me if I’m wrong, if you don’t deposit the full $5,000 it’ll leave you room to do that next year. So you can start an account now and deposit nothing but in ten years you can contribute $50,000 because that’s what you’re eligible for. The contribution room is carried forward and accumulates. But if you deposit money into the account and withdraw it, that will create moor room for contribution.

When the TFSA was first introduced I didn’t think that I would sign up for it because I didn’t see any advantage over the RSPs. RSPs allows you to save up for your retirement and it’s tax deductible where as a TFSA allows you to save up for retirement but it’s not tax deductible. Any interest made on the TFSA isn’t subject to tax but the same goes with RSP. Any interest that was earned in an RSP will be deposited back into the account so there’s no tax on it.

I guess the major difference between the two is that with a TFSA you’re allowed to withdraw the money without having to worry about being taxed but that’s not that point of the TFSA. If you keep taking money out then you might as well open up a chequing account.

The TFSA doesn’t become beneficial unless you have a lot of money in there. If you deposit the annual maximum of $5,000 you can earn just under $100 if it’s high interest account. It’s unlikely for me to deposit that much into a TFSA. It’s better if I used that and deposit it into an RSP where it’ll be more advantageous for me.

For the last month or so, I’ve been seeing and hearing a lot of advertisement for the TFSA but they didn’t give out much information about it. The advertisement just tells people to sign up for it but they don’t inform anyone about the account. People aren’t going to sign up for it if they don’t know anything about it.

I decided to open up one to see how well it can do. I’m planning on deposition $50 a month into that account and letting it grow on its own. I don’t think there will be much growth on it but it’s a start to saving up money. But from what I can tell from my research, I don’t see it doing me any good. It’ll just be an account here I stash my money.