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If you like the tax-free savings account, in a few weeks you'll like it twice as much.

Starting Jan. 1, Canadians can squirrel away another $5,000 in their TFSAs, in addition to the $5,000 they were allowed to deposit in 2009 - the first year of the new savings program.

If you didn't get around to making a contribution this year, don't worry: Any unused contribution room gets carried over, so you'll be able to plunk $10,000 into your account in 2010.

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For investors such as David Stanley, TFSAs have suddenly become more interesting.

"I'm a big fan of them," the retired University of Guelph professor says. "Any opportunity you get like that ... you certainly should explore it."

As the TFSA enters its second year, the good news is that investors will have more money to work with in their accounts. While that will give them more flexibility to spread their funds across different types of investments, it also means they'll have to give more thought to how they allocate their capital, taking into account their goals, risk tolerance and stage in life.

Some people treat their TFSA as a temporary parking spot for emergency funds. Others use it as a vehicle to save for a new car or down payment on a home. For his part, Mr. Stanley plans to invest in dividend-paying stocks such as banks, pipelines and utilities.

"I think a lot of people view [TFSAs]as a sort of short-term savings account. That's okay. There's nothing wrong with that," he says. "But it can also be a long-term vehicle."

With interest rates at rock-bottom levels, more people are giving a pass to so-called "high interest" savings accounts and seeking out the potentially better returns of stocks. Camillo Lento, a lecturer in accounting at Lakehead University in Thunder Bay, Ont., is leaning toward putting his 2010 TFSA contribution into an equity exchange-traded fund, or ETF, for diversification.

"The interest rates are so low right now, to put $5,000 in a guaranteed investment certificate or in a savings account, you don't really get much bang for your buck," he says.

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With a possible house purchase in his future, he likes the flexibility of being able to withdraw money from his TFSA at any time without paying tax on the funds. Any interest, dividends or capital gains in a TFSA also accumulate tax-free. Another plus is that, if money is withdrawn in one year, the contribution room is increased in the subsequent year by an equal amount.

Investor Education: TFSAs

  • TFSA or RRSP: How to choose?
  • Note to Flaherty: TFSAs are good but they can be so much better
  • Using a TFSA can help get retirement plans on track
  • The right way to use a Tax Free Savings Account
  • Learning from TFSA's rule book

Sterling Rempel, president of Future Values Estate & Financial Planning in Calgary, says most of his clients who have a TFSA are using it as a "stash for cash." But some are putting a chunk of their money into equities and using it as a long-term growth vehicle, which is where the TFSA "really excels because ... if they get a big bump up that's all going to be tax free."

For his own TFSA, Mr. Rempel, a certified financial planner, is going with an all-growth strategy. He's invested in a "fund of funds" with 100-per-cent exposure to Canadian and international equities. "I'm 46 years old. I've got a fair amount of time before I wish to get to my own retirement, and I wanted to maximize potential returns," he says. "I'm able to weather the ups and downs of the market so that's where I went."

Despite their many benefits, TFSAs aren't appropriate for everyone. Jason Heath, a certified financial planner with EES Financial Services in Markham, Ont., says people with credit card and other consumer debts should pay off their balances before they think about opening a TFSA. Paying off one's mortgage first is also a good idea, he said.

One drawback of TFSAs are the administrative fees charged by some - but not all - financial institutions.

"From my perspective, to pay a $50 fee to save $50 or $60 in tax is not worth the paperwork," he says. "By 2010, when there's $10,000 of room and still just a $50 fee it starts to make a lot more sense" because the fee will be smaller as a share of the total assets.

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Still, he says TFSAs have a clear edge over registered retirement savings plans for one group in particular: low-income earners. Contributions to an RRSP generate a tax refund, but when the money is withdrawn later it counts as taxable income, which can potentially reduce income-tested benefits such as old age security and the guaranteed income supplement. For that reason, low-income earners are better off choosing a TFSA, Mr. Heath said. His advice to people weighing the benefits of TFSAs and RRSPs?

"Proceed with caution. An RRSP isn't necessarily the holy grail. Nor is a tax-free savings account. You can't just trust blindly. You've got to look at it on an individual basis."

But for many investors, the TFSA is a welcome addition to their tax-saving toolkit.



18 The minimum age before you can open a TFSA. You also need a valid social insurance number.


The current annual contribution limit. Any unused amount can be carried over into subsequent years. The limit is indexed to the inflation rate and rounded up or down to the nearest $500. So, assuming an inflation rate of 2 per cent, the contribution limit would rise to $5,500 in 2012.


The value of assets in the 3.6 million TFSAs that Canadians opened by the end of June, according Investor Economics and Ipsos Reid.


The amount of tax charged on TFSA withdrawals. When money is withdrawn, contribution room rises by an identical amount in the following year.

John Heinzl

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