HOW DOES a TFSA work?

A tax-free savings account is a registered savings vehicle, where contributions are made with after-tax dollars and withdrawals are tax free. This means that money can be earned in the account and withdrawn at any time without being taxed.

 
If you’re a Canadian resident age 18 or older, you can benefit from a savings account.
 

Simple & Accessible – you can contribute up to $5,000 annually, regardless of your income.

 

Interest, capital gains or dividends earned are not taxable even when withdrawn.

 

Unused annual contribution room accumulates indefinitely
 

ADVANTAGES of a TFSA

Choice of Investments – you have the freedom to choose from a variety of investments that reflect your needs and will help you reach your objectives

Up to 5000 annually can be contributed and withdrawn without any tax implications
 
Ease of Withdrawals – Any amount can be withdrawn at anytime without penalty for any use  
 
Ideal complement to an RRSP – the TFSA is an efficient way to save and put more money towards your retirement 
 
Practical Income Splitting tool – a couple can contribute to two TFSAs even if one does not have an income 
 
No affect on Income-based Government benefits – contributions or earnings do not affect eligibility for the Guaranteed Income Supplement, Old Age Security,

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TFSA vs. Non-registered Investments

 

Assumes a $5,000 annual contribution for 20 years, a 6% rate of return and an average tax rate of 45%.

 
The table shown here is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of invested contributions. The rate of return is for illustrative purposes only.

 

Capital gains and other investment income earned in a TFSA are not taxed.

 

So, if you contributed $5,000 a year for 20 years to a TFSA, you would enjoy a total tax savings of $51,865 over a non-registered account.
 
As of 2009, any Canadian resident over the age of 18 can save up to $5,000 every year in a TFSA. The $5,000 annual contribution limit will be indexed to the Consumer Price Index and rounded to the nearest $500. For example, with a 2% rate of inflation, the first increase to $5,500 would occur in 2012.