The Tax Free Savings Account (TFSA) was first introduced by the Canadian government in 2009. Each year Canadians aged 18 and over could contribute up to $5000 per year into their TFSA and not be taxed on any earnings made on their contributions.
The government recently announced, however, that starting in the year 2013, Canadians will be able to contribute $5500 rather than the original $5000. They did this in order to account for inflation. This is good news for Canadians as it allows them to invest a little bit more each year without having to pay tax on their investment earnings. This is especially good news for those of you who are using your TFSA in order to save for retirement or other long term goals. The more room you have to contribute, the more you can take advantage of the tax break on investment earnings over the long term.
But here’s the thing you need to know. Just keeping your money in a savings account within your TFSA will not really save you much in tax because the interest rates are still so low. In order to really take advantage of this tax savings opportunity, I would encourage you to invest the money in your TFSA in something that will make your money grow and have higher potential earnings. That way when you make some money and get to keep all of it, it will be much more advantageous.
The increase is also good news for older folks who have money to invest. In fact, for those who have many other financial obligations, the increase will be practically meaningless for the time being, however, for those who have the extra money to put aside, this increase over time will be quite useful. Looking at the big picture, the TFSA is a good thing for Canadians, and even if you cannot afford to fully utilize the account right now, that doesn’t mean it won’t be beneficial for you in the future.
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