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Still turned off by today's low rates? Just wait till January, when you can shelter up to $5,000 a year from tax.
The tax-free savings account, introduced in the most recent federal budget, will be available on Jan. 2, 2009 (when financial institutions reopen after the holiday).
Banks, investment dealers and mutual fund managers are taking applications already. They're starting to advertise and posting information at their websites.
ING Direct has gone a step further. It's offering bonus interest from now until Dec. 31, if you apply for a TFSA and put money into an investment savings account.
Suppose you deposit $1,000 at ING's current 3 per cent rate. Instead of earning $2.50 a month, you will get double the interest – or $5 a month – to make you feel as if you're paying no tax on your investments.
"We're opening thousands of tax-free accounts every day," says ING chief executive Peter Aceto. "I've already opened an account for myself, my wife, parents and in-laws."
How is the new tax-free savings account different from a registered retirement savings plan?
There are two key differences:
Contributions to a tax-free savings account are not deductible from your taxable income, as are RRSP contributions.
Withdrawals from a tax-free savings account are not added to your income and taxed at current rates, as are RRSP withdrawals.
The tax-free savings account also offers greater flexibility.
You can take money out any time and replace it later without losing your ability to make future contributions, as you do with RRSPs.
You can use a tax-free savings account as collateral for a loan, which you can't do with an RRSP.
You can put money into a tax-free savings account for a spouse or child over 18 without being subject to the attribution rules that apply to RRSPs.
This means you won't be taxed on the income in a spouse's or child's TFSA and you can still contribute up to $5,000 to your own plan.
The tax-free savings account also provides a measure of fairness for poorer citizens.
Since RRSP withdrawals boost your taxable income, they can reduce your eligibility for means-tested benefits – such as the guaranteed income supplement and nursing home subsidies.
"For some time, government programs in Canada have not only discouraged personal saving by lower-income Canadians, they have often effectively prohibited it," says a paper published last month by the C.D. Howe Institute.
"Some commentators may criticize TFSAs on the basis that `low-income Canadians don't save.' But that is not the case – they do save, just in small amounts," say the paper's authors, John Stapleton and Richard Shillington.
TFSA withdrawals, which are not subject to clawbacks of benefits, will allow low-income Canadians to save in a more fruitful way, the authors say. But it's urgent for provinces and territories to also address the obstacles to savings posed by needs-tested programs.
One final point: A tax-free savings account is not just for interest investments. It can shelter any income – stock dividends or mutual fund distributions – from tax.
So, ask your financial institution whether this new registered plan makes sense for you and when you can prepare the paperwork.
By January, banks will be busy with RRSP sales and will have less time to talk.
Ellen Roseman can be reached at
eroseman@thestar.ca by email.
