Tax free savings accounts (TFSAs) are coming soon to a financial institution near you.
In a couple of months, Canadians will be able to start tucking away money each year tax free in the new accounts.
Some financial experts believe TFSAs, announced in the 2008 federal budget, are a great way for Canadians to generate wealth and save more for their retirement – important because more and more studies indicate Canadians are not financially prepared to retire.
"The creation of the TFSA demonstrates the government thinks many Canadians are not as financially prepared as they should be for their retirement," says Dave Ablett, senior tax and retirement planning specialist with Investors Group.
"This program offers Canadians a greater incentive to save," he says.
Starting in 2009, Canadians 18 and older will be able to put up to $5,000 a year in a TFSA in most of the same types of financial products that you can put into an RRSP, such as stocks, GICs and mutual funds. All investment income generated in a TFSA is tax-free, including when the funds are withdrawn.
Recent studies have shown that many Canadians are not financially-prepared for their retirement.
The Association of Canadian Pension Management says the typical pension plans being offered to Canadian workers won't make a "meaningful" contribution to the creation of an adequate retirement income.
Another recent study by the Canadian Institute of Actuaries and the University of Waterloo concludes that about two-thirds of Canadian households expecting to retire in 2030 are not saving enough to meet their necessary living expenses such as food, shelter, clothing, transportation, health-care costs and taxes. Canadians will need some combination of Old Age Security (OAS), Canada and Quebec Pension Plans, home ownership, a work pension, and savings through an RRSP and non-registered savings, to generate a sufficient income in retirement, the study says.
TFSAs have a number of very favourable features for seniors, as well as most other Canadians.
Like RRSPs, any unused contributions in a TFSA can be carried forward to future years. Any withdrawals made from a TFSA also can be replaced in the future.
The annual contribution limit of $5,000 will be indexed to inflation and the annual additions to the contribution room will be rounded to the nearest $500.
While the contribution limits are much smaller than an RRSP, TFSAs are a great supplement to a registered pension plan and you can continue to contribute to them after the age of 71, when RRSPs must be collapsed. Any payments from a TFSA will not affect government-assistance programs such as the OAS. And TFSAs also can be used as collateral for a loan or to start a business, unlike RRSPs.
Canadian companies are even considering offering TFSAs to their employees as part of a benefits package.
A study by Hewitt Associates, a human resources services company, shows that 43 per cent of Canadian employers surveyed are either likely or highly likely to add a TFSA to their employee benefits program.
