Is Tax-Free Savings Account (TFSA) right for you?

Not really a comment on the TFSA directly, but why does the Government continue to create things that benefit people that have money already and ignore those scraping to get by? Increased contribution levels for RRSP's, this new TFSA, the" limited time offer" $100,000 capital gains exemption (which was then withdrawn after all the fat cats cashed in), etc. don't help those that don't have discretionary income and are living paycheck to paycheck. Income tax cuts are what I want to see implemented, even before any GST cuts because the GST is a consumption tax and all the self-employed who do work "under-the-table" to evade income taxes can't evade the GST as easily (this is an area that should be really cracked down on!!!).

As Bob pointed out, this does nothing for the average joe. If you have money to save, use the room in your RSP ( of course, if you have no room you are probably one of the fortunate few that can afford this option). People, this account does not work like an RSP; these are after tax dollars you are saving/investing. Your RSP contributions are tax deductible; your TFSA contributions are not. Only the interest/earnings on the money you put in is tax free and with the current economy, the interest/returns on this are minimal.

The Conservatives still haven't figured out what they are doing. Flaherty still thinks savings are good for the economy while stating consumer spending is what is needed to stimulate the economy. So which is it Joe?

Well, to understand the TFSA, you have to look at the big picture, especially as we see it developing, given the status quo in the trade situatiion etc. Consider the collapse of the defined benefit pension plans; consider the loss of health benefits by bankrupt or fleeing corporations; consider millions of retirees now having to survive on shrinking RRSP's. The government is giving younger people an incentive to save (they'll have to) and a tool (small as it is) for older ones to shoulder most of extra cost they'll have to bear. It simply reflects the reality of fending for yourself.
As far as the government is concerned, if your just making end meet then your spending too much (stop), or you need a better job (go back to school and learn how to ship jobs overseas) or your just plain lazy ( too bad for you)! Just an opinion.

James you made some good points.
Bob I'd also love to see income tax cuts to help the average Joe, but in the mean time the TFSA is what have.
Tory you forget that the TFSA does offer you extra flexibility.
If you were contributing up to 5,000 a year to your RRSP (tax deductible) you could not withdraw without paying 15% witholding tax . But if you were to contribute that amount into your TFSA instead, and then transfer the 5,000 at the end the year, you will get the tax deductible advantages of the RRSP and the access to your money if you needed it and pay no witholding tax.
This makes it a lot easier for average folks to contribute to their RRSP their know they don't have to wait till 71 or do a HBP/LLP to have access to RRSP saving.

Id like to know if you recommend transferring money out of an RRSP that is being used for about 5k/yr for living. with a current balance just over 100K. I would have to jump my withdrawal from the current 5k to at least 10k, but in 10 yrs I figure that 50k+ in TFSA is better than 50k RRSP. My main yearly income is from my pension which I am starting next May1 at 24,000 yr. I have 0 debts, and own my house. I anticipate collecting CP at 60, but I may find part-time work too, as my current savings are being used up and will be done by next summer, thus why I am starting company pension. Thanks

http://www.garth.ca/

Whether your a fan of Garth Turner or not, he provides a bit of a summary of the TFSA. As I mentioned before, the TFSA best suits the wealthy. Fred, flexibility is for the wealthy who can afford to save; if you have any "extra money" your first priority should be an RRSP. If you're looking to save for a big screen TV, why bother.

Thanks Garth's website Tory.
But I still stand by what I said. Even if you can only afford to contribute $500 per year into your RRSP, puting it in your TFSA first then transfering it to you RRSP before the end of the tax year offers some much needed flexibility.
Besides the wealthy do have to worry about flexibility of $5000 but the average Joe does.
I do not consider myself wealthy, but if I can squeeze out $50 a month to put aside for my RRSP I would hate having to pay witholding taxes when I withdraw it in an emergency.
The RRSP does reduce your taxable income, but that only happens on march 2nd. You can contribute to your TFSA then transfer it to your RRSP (in full or the amount you can afford) before the contribution deadline.

How much interest % do you make on a TFSA ? 2or 3 % ? Why bother?

Let`s do the numbers again. Maximum contribution is $5000 of income already taxed. Investment vehicle is GIC at less than 3% for a return of approximately $150. Taxes payable on $150 at 25 % equals $37.50. Jim Flaherty wants to exempt $37.50 per annum. How generous. No wonder the PM is in hiding. This recent business with rapidly diminishing RSP`s has caused much resentment from the "boomers" who were burned by all the retirement promises. The youger generation is now leary of investing into somethingthey can`t fully understand. The tfsa is a way for the government to lure in those wary youngsters, achieve a large concentration of cash in a traceable area, then change the rules or find a way to own it. You think that`s paranoid,,, Ask those who are trying to retire right now.

You have to have money to put into a savings acc...The average blue collar worker like myself lives paycheque to paycheque, with a savings acc. of ZERO!... GEEZ! the GOV. is out of of touch with the average consumer!!

Perhaps with the present economic situation a TFSA MIGHT make sense asuming that the returns are positive.

Deflation makes money more valuable. Then again, the situation also means huge unemployment, compliments of a government that has exported virtually all manufacturing out of the country through free trade agreements and and the elimination of import tarrifs and quotas. It can only get worse before it gets better.

But the tax on CAPITAL GAINS is only a quarter iof what it is on interest . . and interest tends to run BELOW the rate of inflation. So where is the great benefit?

After all, we are investing tax paid money to get these 'benefits'. Even the vaunted RESP is a crock - after contributing the max and having professionals manage the money, I am left with less prinicpal than I have put in - and THAT is after the government fattened up the pot by 25%. The only good thing about it is that there'll be no taxes due when it gets cashed in . . . thanks for the gift Mr. Taxman - after 10 years I'm left with less purchasing power than I started out with AND I've lost a pile of the government's money to boot - and that's before we factor inflation into the equation!

The TFSA is the same, xcept this time around I won't have the government's contribution to lose . . .

Essentially one reason we are no longer savers (as a society) is that putting our money in the bank, even tax free is a losing proposition over time, whether the returns are taxed or not.

I am in my mid-fifties and am debt-free. I am debt-free because when I was younger, I put extra $ against my debts whenever I could instead of using that money to buy a big-screen tv, or a second car or a holiday,etc. I realize that some are living paycheck to paycheck because they have no choice, but others are doing so because of terrible money-managing skills and a horrendous lack of discipline. Those people should not be criticizing TFSA's because they have no money to invest. I do believe that this is a useful tool for those who are wise with their money.

how about benefictarys.i wonder if you can appoint any.

As gigger pointed out the TFSA 'could' only net you $37.50 per year in tax free money and that is if you are among the fortunate who actually can save the present max of $5000. This holds true only if you choose to invest in low rate but safe GIC's. "Mutual funds, securities listed on a designated stock exchange, bonds, and certain shares of small business corporations may also be included." Therefore if you were able to invest any money in mutal funds or stocks now the capital gains would be tax free and you can withdraw at any time. The only downside to investing in mutual funds and stocks through a TFSA is capital losses cannot be reported on your taxes. After this last quarter's freefall, the chances of having capital losses anytime soon are slim.
Another point to consider when comparing TFSA vs RRSP is if you are young and just starting your career chances are you are presently in a lower tax bracket than you will be at retirement...you could actually end up paying more taxes on withdrawal at age 65 than you saved at age 30.
RRSP's can benefit you if you are to invest when times are good to reduce your tax bracket and withdraw in lean times...a type of income averaging.
Also a thought to consider...unless their is an eligible beneficiary (spouse or dependent child) the total amount of your RRSP or RRIF become taxable income for you in the year of your demise (that would most likely be the maximum tax rate). The tax man will always get you and the gov't is hoping you will make your maximum deposit to your RRSP every year until retirement. They schemed for the future and they are now reaping their rewards. It would be an interesting survey for someone to track RRSP investments, tax saved at time on investment vs paid at time of withdrawal.
The TFSA so far seems to benefit the consumer.

Does anybody seriously believe that CPP is still going to be around in 10 yrs? How about 15 yrs? The baby boomers are going to decimate the entire CPP program. There are not enough young workers contributing towards CPP to keep up with the massive amounts that are going to be paid out in the next decade or two.
For years, we have been told to contribute towards RSP to help suppliment our retirement. CPP was going to pay us enough to pay our bills, but to retire more comfortably, we needed to buy RSP's now & withdraw them in the future so we could go on vacations after retirement.
Guess what.....No more CPP....You need RSP's to pay your bills & to go on vacation. If you withdraw too much out of RSP's & RIF's in one year, then you are going to pay extra taxes. Your retirement savings is going to disappear alot faster because most financial retirement plans include getting an extra thousand bucks from CPP.
People need to save more, if they wish to enjoy their retirement. Is the TFSA the best that the government can do for us? What did someone say earlier the tax savings was...$37.50 per year. The government isn't doing this to give us money. They are trying to tell us to help ourselves instead of asking for goverenment handouts.
I am 38 right now. I am not going to get a penny from CPP, even though I have been paying into it for over 20 yrs. I have known this for years, but unfortunately, I still have to keep paying into CPP.
Is the TFSA good for me? I make 35K a yr & have tons of RSP room available. I contribute towrds my RSP & make my mtg & car payments. I don't have an extra 5K, but if I did, I would buy more RSP's to get a bigger tax break or try to pay off my mtg faster.
The TFSA is great for people that have maxed out their RSP's (max 18K a year) or have paid off their mtg and have no debt. The TFSA sounds like just another plan to help the rich get richer, while the lower income people just keep paying their bills every month & pray that I am wrong & that CPP will still be there to help them through retiement.
I will use the TFSA....After I pay off high interest debt.....In another 15 yrs....Just in time for early retirement if there is still CPP.

Please remember that low income earners will benefit using with the TFSA instead of RRSPs because it doesn't show as income as RRSP withdrawals do and they will still be able to receive the Pension Supplement.

a note of warning. my advisor at TD tells me that in Ontario one cannot designate a beneficiary for these TFSA's so if I die my whole estate could have to go to probate for the sake of one $5000 investment rather than passing directly to my surviving spouse ( all my other savings or investments are held jointly but the TFSA has to be in one name only). Not worth the headache or cost until Ontario changes its rules and allows a beneficiary to be added

I've completed the forms to contribute to a TFSA and I had to provide beneficiary information.

This is a brilliant plan, as my three grandchildren have shown an interest and have already started saving. If this encourages youngsters and others to save,I am all for it. As a society we are big spenders on things we want and do not need, therefore anything that encourages people to save for a rainy day, I embrace.

a lot of people seem to miss the fact that the income earned is tax free...and you get 5000 per year min. to contribute from your 18th birthday....say you work 35 years, even at a steady 5k a year with no allowance for inflation, that is 175000 that you can have invested, and collect the interest tax free...someone earlier equated that to 37.50 per 5000 a year at 3% interest. but say 175000 with a half decent advisor is going to get far more, probably closer to double. Thats an additional $10000ish a year tax free which in todays numbers comes close to equalling a cpp payout.... obviously saving 5000k a year is hard for many people, but you can make up the amount you couldnt save in your 20s in your 50s...and if you can't save that amount for retirement, maybe you shouldn't retire so early.

Neil- ill answer your prayers, the cpp will be there. there are some problems with the system, but the whole doomsday scenario pretty much goes away if the age of eligibility is pushed back to 67 instead of the current 65. a little adjustment to how much is paid out based on need would go a long way too. sorry you can't retire at 53 when you make 35k a year. I'm 24 and make 35k a year and I wouldn't dream of retiring before 55 unless i suddenly start making a lot more cash or stop driving, going out ever, etc. Expecting the government plan to make it so you can work 10 years less than the average canadian has to is kinda what screws the cpp too, those contributions people like you could make from 53-65 add up to a whole lot. especially when you consider people in the 45-65 range generally make a lot more than workers in there 20s and early 30s, hence their contributions are much more substantial