Beginning in January 2009, Canadians will have an extra incentive to save money. It’s called the Tax-Free Savings Account (TFSA). Canadians will be able to contribute up to $5,000 annually to the TFSA, where returns and withdrawals are not subject to income tax. I can see how the TFSA would be useful for my clients. For example a couple wants to renovate their house in 3 years. In 2009, 2010, 2011 they each contribute $5,000 in their own TFSA and invests the money conservatively. By 2012, when it comes time for the renovations, they would have $33,000 instead of $30,000. In 2013, our couple here would have the option to re-contribute in full what they withdrew.
How the TFSA Works
- Any Canadian resident 18 years or older can open a TFSA
- You are allowed to contribute up to $5,000 a year
- Your earnings within the plan are completely tax-free
- You are not taxed on withdrawals
- Your TFSA contributions are not tax deductible
- You can withdraw money for any reason
- Your withdrawals can be re-contributed, in full, in a later year without affecting your regular annual contribution room
- Your withdrawals have no impact on government benefits such as Child Tax Benefit or GST credit
It seems like it’s not much but every little bit counts, especially with the power of compound interest. My economics teacher told me a story about compound interest that I never forgot.
One day little Kirby was thinking of ways to increase his $20/month allowance. So he thought of a plan and he suggested it to his father, ” Daddy, let’s change my allowance to a daily allowance. You’ll give me 1 penny on the 1st, 2 pennies on the 2nd and doubling it every day.” Kirby’s father counted and it was only 64 cents after the first week, so he agreed to it. Can any one tell me how much Kirby’s father owes his son after 30 days?
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