Canadian Tax Free Savings Accounts

[DBR]

I don't really know much about all this financial stuff, and as far as I can figure these TFSAs seem like a good thing, but part of me wonders if there is a catch or something.

What's attracting me to it is the ability to save my money, and retain the ability to withdrawal it in the short term without being kicked in the balls (like what would happen if I withdrew my RRSPs.)

Since I'm pretty accustomed to getting kicked in the nuts whenever I try to get between a bank and my money, I'm thinking that there's probably going to be some kind of delayed nut-kicking on this one... something that I might not feel until the end of the new year, for instance.

Anyone have any advice or thoughts on this new account?

 

[Holdfast]

I don't know the specifics of the Canadian ones, but the general thing with these sort of tax-free savings accounts is that the interest rates tend to be pretty low, even after taking their tax-free status into account. They may make some sense if you're a higher-rate taxpayer or if you have a lot of liquid cash you're holding temporarily while waiting to invest it elsewhere.

As with most things financial, it's about risk/reward and about whether you could be doing better elsewhere.

 

[LaxScrutiny]

You can use a TSFA for any type of investment.

The banks are generally advertising "high" interest savings accounts(3%), but you can have GIC'S, mutual funds, whatever. Just talk to a variety of financial institutions.

With a mutual fund you'll pay a fee/penalty for sudden withdrawl. With GIC you won't be able to withdraw any time. There are the usual limitations with different investments.

The amount you will earn on the $5000 limit for the first year, and the amount of tax you would then save will be minimal. The investment only makes sense if you treat it as an RRSP and make it a long term thing, or at least build it over a number of years and use it for a large down payment on a house or something like that.

Open one this year even if you don't make a large investment, because the $5000 limit carries over to future years, so you could do $10,000 next year, as long as you open it now.

The TFSA makes more sense than an RRSP for people with low to middle incomes. This is because when you cash your RRSP you will see a large taxable income that year. This means you pay a fair amount of tax, and for lower income people you will miss out on the federal pension supplements for a year or so. In a worst case, you cash a large RRSP over 5 years, and lose the pension supplements to clawback for all 5 years. This wouldn't happen with a TSFA if you treat it as retirement savings, there is simply no tax, and it is never treated as income.

 

[DBR]

Thanks guys.

I did not know that not opening an account this year disqualifies one from any future retroactive goodness, interesting! I just thought everybody, beginning Jan 1 2009, was eligible for the carry over.

Do my contributions to the account allow me it to get tax credits from my gross like an RRSP then?

And do you know how a TFSA might work for short term or day trading? These days for fun I like to play the high's and low's a bit; buying and selling stocks X, Y, and Z for minor gains every week or so, and if I buy $5000 of X, Y, and/or, Z--or any combination of--and sell it a week later for $5200, when I go to buy again can I only reinvest the $5000--all within my TFSA within a given year? Can I even trade within a TFSA, and would I want to versus parking my money in a GIC or MF?

And that leads into my next question: what about capital gains and capital loses within the account?

 

[Sledder]

Do my contributions to the account allow me it to get tax credits from my gross like an RRSP then?

No, you don't get any tax credits for your deposits into the account.

 

[LaxScrutiny]

I don't know if you can do day trading with it, but if you have such an account already with etrade or someone, just ask them. To be tax free, that would have to include capital gains, there isn't anything else to tax really with a day trading account, you're not likely to see many dividends. If you aren't paying capital gains, don't expect to be able to use capital losses, duh.