March 5th, 2009
Now that it is 2009 Canadians have access to the newest type of savings account, the Tax Free Savings Account (TFSA). The TFSA will give investors an opportunity to capitalize on tax free investment benefits. This new account is not widely understood, however, Canadians are excited to learn how it can benefit their financial futures.
One of the primary points to understand about the TFSA is that it is not merely a savings account as you may be familiar with from your local banking institution. A savings account creates an image for many of a low interest, liquid type of cash account. And while you can invest into cash within your TFSA, it presents virtually a limitless list of investment options to consider investing into, including securities, debt instruments and even real estate investments. An investor can invest in virtually whatever investments they wish inside of their TFSA accounts.
Most Canadians are familiar with the traditional RRSP investment account, commonly used for retirement purposes. Unlike the RRSP account, contributions made into the TFSA account are made on an after tax basis. Therefore, when the account owner withdrawals their funds, they are not subject to income taxes as they would if they had invested into an RRSP account. This tax free benefit is one of the largest draws for investors to consider utilizing the TFSA for their financial purposes.
Another key difference between the TFSA and traditional investment accounts is that funds can be withdrawn from the TFSA for virtually any financial purpose. For example, a TFSA owner could utilize those funds to purchase a home, a car, to send their children to college or as a retirement savings vehicle. This flexibility to withdrawal funds without a financial penalty creates flexibility that is attractive to most investors.
One last key difference between this new TFSA account and other retirement accounts is that money can be re-contributed into the account at a later date. For example, if an individual contributes their maximum allowable funds into the TFSA account each year and makes a withdrawal 5 years after they open the account, they can re-contribute the withdrawn amount into their TFSA so that they can take advantage of the tax free benefit again within their future. So, the ability to use this investment vehicle for shorter term financial goals as well as for long term financial goals is appealing to most investors.
While no investment vehicle is a perfect match for every investor, there are several key advantages to the TFSA that should be taken into consideration when creating both a long term and a short term financial strategy. Once the decision has been made to utilize the TFSA for financial goals, the specific investments must be selected for the account to hold. Personal risk tolerance, total investable assets, asset allocation, investment time frame and investment purpose should be taken into consideration when making these individual investment selections.
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