With the new year well upon us we welcome new opportunities. If you haven’t contributed to your Tax-Free Savings Account (TFSA) for 2010 it may be a good time to do so. Every year Canadians are allowed to shelter $5,000 in a TFSA. The name, however, is a source of confusion. I think the government should have called it a Tax-Free Investment Account as the words ‘savings account’ has led to a lot of confusion. The funds you place in your TFSA can be invested just the same as your regular investments. Whether you invest in GIC’s, bonds coupons or if you are a stock-affectionato you can hold many of these options in your TFSA potentially earning more than a regular savings account. Much like a RRSP where income is sheltered the TFSA is different becasue you will not receive a tax deduction for your personal income tax filings but you will not receive any T3’s or T5’s (for dividends and interest income) from income generated while the funds are in the TFSA. The account is also accumulative so if you missed putting the maximum in for 2009 you are able to put in $10,000 in 2010. Conversely, if you take out the $5,000 you put in in 2009 you can replace it and also add another $5,000 for 1010. Also, unlike a RRSP, if you take the money out this year you do not have to include it as income in your 2010 tax year’s filings as you never received a deduction for it (a tax advantage) in the first place.
If you are thinking that you cannot make a RRSP contribution and a TFSA contribution at the same time then consider a couple of options. You can make the RRSP contribution and with any refund monies you can place it in your TFSA. Also, if you have any current non-registered investments you can always move existing investments over to your TFSA without adding any new funds.