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Tax-Free Savings Accounts Explained

Four reasons to open a TFSA Add to ...

There are a variety of benefits to a TFSA, even if you only save a little a year. Your savings can build faster because you don't pay tax any on your earnings.

1.  You're already contributing the full amount to your RRSP each year

 When you retire, you can draw income from your TFSA tax free. This may allow you to delay taking cash from your RRSP – and paying the taxes on those withdrawals.

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2.  You expect your income tax rate to be higher when you take money out of the TFSA

The money you put into a TFSA has already been taxed. So if your marginal tax rate is higher when you take the money out, you'll have paid less in taxes. The opposite is true for saving in an RRSP. A higher tax rate over time will increase your tax bill when you withdraw your RRSP savings.

3.  You need a flexible savings plan

You can carry forward any unused contribution room in your TFSA to future years. And, if you withdraw your TFSA savings, you can put back the full amount of your withdrawal at a later date and still save the maximum each year. 

4.  You want to reduce taxes on your investments

You can use the TFSA to shelter investments that would otherwise be taxed at the highest rate. That's because you don't pay tax on your TFSA's earnings. Examples: interest income or foreign dividends. You may want to get some professional advice on how you can use a TFSA as an effective part of your tax planning.

Advantage for lower-income households: If you receive money from government programs based on your income, your TFSA won't affect the amount you receive. From the Canada Child Tax Benefit to the Guaranteed Income Supplement (GIS), your credits and benefits stay the same — no matter how much money you take out of your TFSA. Keep GIS benefits with a TFSA. Read Pat and Sophie's story to see how this works with their GIS.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

Follow us on Twitter: @GlobeInvestor

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