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David Konning

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Everyone has different reasons for saving and investing. But no matter what your goals are, you may be able to realize them sooner with a Tax-Free Savings Account (TFSA). This registered account is unlike anything Canadian investors have seen before.

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Investment returns in the account - whether interest, dividends or capital gains - are not taxed, even when withdrawn. A TFSA has the potential to help you reach your goals sooner.

To be eligible to open a TFSA, you must be 18 or older, a Canadian resident and have a Social Insurance Number (SIN). The age of majority is 19 in New Brunswick; however, you start to accumulate contribution room at age 18.

The 2009 contribution limit for each account holder is $5,000. This limit will rise along with inflation in future years, in $500 increments. The federal government will report your TFSA contribution room to you annually. There is no tax deduction for contributing to a TFSA.

However, the returns your investments generate in a TFSA are not taxable. This tax-free compound growth means that your money grows much more quickly inside a TFSA than in a taxable account. You can withdraw money from your account at any time, (depending on what you invested in).

In addition, you can re-contribute the amounts you withdrew anytime after the year of withdrawal. For example, if you contribute $5,000 in 2009 and then withdraw $2,000 later the same year, your 2010 contribution room will be your $5,000 annual limit for 2010 plus the $2,000 that you withdrew in 2009.

The TFSA has a number of special features that make it useful in a wide range of situations.

You can make withdrawals whenever you want, for any purpose. Withdrawals are added to unused contribution room starting the following year. Unused contribution room is carried forward indefinitely, so you can re-contribute whenever you have the money.

You can hold a wide range of investments in your account. You don't need to have earned income in order to make a contribution. Unlike other tax-deferred plans, earnings in a TFSA are never subject to Canadian tax. You don't pay taxes even if you withdraw.

There's no requirement to collapse your account at a set age. You can keep it as long as you live. This makes it especially valuable as part of a long-term strategy that also includes RSPs/RIFs.

The TFSA lets you create a flexible, tax-sheltered savings fund you can use for a variety of purposes. You can use it for short-term goals, such as a new car, a dream vacation or even a new home.

But you can also use it in addition to your registered Retirement Savings Plan (RSP) to help you reach long-term goals, such as providing funds for your retirement. How you use a TFSA and the benefits it can provide will vary depending on your individual situation and investment goals. Here are some of the ways in which you might choose to use it.

How you use your Tax-Free Savings Account depends on your own personal needs and goals. Please give me a call to discuss how the TFSA may benefit you.

* David Konning is an investment and retirement planner at Royal Bank. If you would like to reach him, please e-mail him at David.Konning@rbc.com or phone 856-0406. Financial planning services and investment advice are provided by Royal Mutual Funds Inc., a member company under RBC Investments. Royal Mutual Funds Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated.