RRSP Season Insights - # 3
Monday, February 04, 2013 by: Baytoday Business Wire
Feature, BayToday.ca- Kingsdale Capital Markets
- Kevin Hutchison
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RRSP Season Insights: Article 3 of 7
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Tax Free Savings Account: Much More Than a Place to Store Cash
Last week we discussed finding the right “mix” across debt and savings, and investing in RRSPs.
Our focus today is on the popular Tax Free Savings Account (TFSA).
Research suggests that a growing number of Canadians, nearly 50 per cent, have a TFSA.
You can contribute a maximum of $5,500 per year (increased $500 on Jan.
1) to your TFSA, for a total cumulative amount of $25,500. This total will be less if you hadn’t reached 18 years old by 2010.
Within a TFSA, investment returns grow tax free forever and there is no tax on any withdrawals. Call it the “no tax” account.
Whether the investments within the TFSA provide interest, dividends or capital gains, and regardless of how much return is generated, there is no tax owing.
Tax free really means tax free.
In light of this, what do many Canadians hold in their TFSA? …….cash!
Simply holding cash in your TFSA largely defeats the purpose of a TFSA. You’ve likely paid tax on the cash prior to it reaching your hands, so it isn’t subject to further taxation in its current state.
The average Canadian is not to blame for this oversight, as the phrase “Savings Account” in “Tax Free Savings Account” makes it sound much like, well, a regular savings account.
Instead, think “Tax Free Investment Account”.
The reality is that any investment you can hold in your RRSP, can be held in your TFSA.
This includes stocks, bonds, mutual funds, exchange traded funds and so on.
The good news is that Canadians are increasingly making better use of their TFSAs by holding more long term, growth oriented investments, as opposed to cash and low interest vehicles.
Contributions within the TFSA are accessible and if withdrawn, can be replenished the following year, in addition to your yearly limit.
Unlike the RRSP, contributions to your TFSA do not provide a potential tax return.
What should you do?
Invest in a TFSA based on a mix that suits your situation and investment strategy.
Next Monday we will discuss investment tactics for your TFSA and RRSP.
Kevin Hutchison is a Financial Advisor at Kingsdale Capital Markets and lectures part-time at Nipissing University.
He is a member of the Rotary Club of North Bay-Nipissing and a member of the board of directors at the North Bay Regional Health Centre.
He holds a BComm (Hons.) and MBA.
Kingsdale Capital Markets
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