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The Smart Cookies

Why haven't you opened a TFSA? Add to ...

It's safe to say five out of five Canadians like free money. Why then have only one in five opened a Tax Free Savings Account (TFSA)?

Forty-four per cent of respondents to a Leger Marketing survey said their reason for not opening a TFSA is lack of funds. While it may be tough to find extra cash to sock away, neglecting your TFSA could cost you hundreds of thousands of dollars.

The earlier you start contributing and the more you have to invest, the better a TFSA becomes. Anyone over the age of 18 can put up to $5,000 into one of these savings accounts for 2009 (with future years' limits indexed to inflation). All income and gains earned within a TFSA are tax-free for life. So are withdrawals.

If you don't fulfil the maximum allowed contribution in any one year the balance is carried over to the next year. If you only save $2,000 in 2009 you'll be able to contribute the maximum amount for 2010 plus the $3,000 carryover.

Anything you earn or withdraw from your TFSA can be re-deposited. Say you invest $5,000 in mutual funds that grow at an average of 7% for three years - that's a grand total of about $6,125, $1,125 of which you've earned tax free. If you decide to withdraw the full amount you'll be able to put $6,125 back in the account at a later date. Any amount withdrawn is added back to your maximum allowed contribution for the next year without penalty.

If you already have savings stored elsewhere, move them immediately to a TFSA. If you're expecting a tax return this year, consider putting it directly into the account. With the average refund for 2009 at $1,411.03 you'll be making a good start on building your wealth - tax-free.

To keep the momentum going set up an automatic payment plan when you open your TFSA. Even if it's just for $100 a month, you're getting into the good habit of putting money away. Also be sure to name your beneficiaries. And if you're working with an adviser make sure to talk fees - don't let your tax-free savings get eaten up by extra costs or charges.

Opening a TFSA is a no-brainer, but determining what investments to hold in it (like an RRSP, the account lets you invest in a variety of things) is more challenging. Whatever you do, don't let analysis paralysis stop you from reaping the benefits of this fund.

The goal of your investments should be to minimize risk while maximizing return and tax effectiveness. What you choose to invest your money in will depend on your risk tolerance and what you want your account to do for you.

But before you start gambling away your paycheque with risky investments, seriously consider building a rainy day fund. Most financial advisers suggest stockpiling three months of living expenses, but it's ultimately up to you to decide how much you need to put in the bank to sleep well at night. Just make sure the money is available when you need it by keeping it in the form of safe, liquid investments like a high-interest savings account or GICs.

After you've banked your emergency savings, you may be ready to make riskier investments in search of better returns through your TFSA. At this point, it's worth your while to consult an adviser who can help hatch a plan for your portfolio.

Meantime, get a better idea of how a TFSA will work best for you at . The site lets you play around with numbers, scenarios and timelines to see how fast your savings will grow. It's always nice to see how your money can multiply, especially when it's tax-free.

Angela Self will be writing for Globeinvestor.com weekly. She is one of the founders of the Smart Cookies, a group of five women who specialize in personal finance. They are hosts of a self-titled show on the W Network and the authors of The Smart Cookies' Guide to Making More Dough. Find out more about them at

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