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The TFSA: How Does It Work (Part 2 of 4)
Posted on January 13, 2009 at 4:13 pm
Filed Under Financial Planning, Investment Planning
As discussed in yesterday’s post, today I will be explaining the basics of how the new TFSA actually works.
According to the official definition as stated by Canada Revenue Agency, the TFSA is “a new way for residents of Canada to set money aside tax free througout their lifetimes.” They go on to say that “contributions are not tax deductible for income tax purposes and the income earned inside the account is tax free, even when it is withdrawn.”
Because there are a number of rules surrounding this amazing new account, I have chosen to use a point form format to better explain what they are:
- Owner: Only the account holder can contribute to their own personal TFSA
- Eligibility: Any resident of Canada who is 18 years old and holds a valid SIN
- Beneficiary: You can stipulate who your beneficiary is and all proceeds at death are passed down tax free
- Contirbution Limit: The annual dollar limit is $5,000 per account and will increase with inflation each year
- Withdrawals: Any withdrawal is tax free and the limit for the following year increases by the same amount
- Investment Choices: You can choose from mutual funds, securities, GIC’s, Bonds, even savings accounts like ING
Your Take-Away: As I’ve mentioned previously, this is a tremendous new investment vehicle and it is well worth your time to look into this further. Learning how to properly incorporate this new account within the rest of your financial plan appears to be one the largest challenges that most will face, which is why understanding how it works is so essential.
If you would like to read more detailed information about the TFSA and how it works, please see the attached CRA document entitled “The TFSA Explained by CRA“.
Until next time, have a Terrific Tuesday.
Chris
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