Benefits of a Tax-Free Savings Account (TFSA)

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Ever since the introduction of Tax-Free Savings Account by the Canadian government, the industry has transformed in many ways. The account basically allows Canadians to make after-tax contributions without having to pay taxes on earnings from that account. In addition to this, the accounts are not charged any withdrawal taxes whatsoever.

To fully understand this type of bank account, here are some of the benefits and uses for the new account that will show you how to save tax to your advantage:

You get to save for large purchases during your years of working

This is probably one of the greatest benefits of having this account. The account works best for those people planning to make huge investments in future such as saving up for a car or saving for a vacation. Before the introduction of this account, people were required to pay a certain marginal rate on the interest earned on your savings as tax. This made it hard for individuals to save large amounts of money because individuals were not getting any tax savings benefits. This is why the Tax-Free Saving Account has generated a lot of excitement among Canadians who are willing to embrace this new change.

Retirement Planning

When compared to RRSP accounts, TFSAs are not as good for retirement planning. This is because RRSPs normally allow an individual to defer all the tax payable on the amount that is contributed and then goes ahead to pay less tax once a withdrawal is made. With TFSA, it is slightly different as the account holders are subjected to paying their marginal tax as soon as it is earned.

Non-registered investing

This affects investors who are known to have money saved up in non-registered accounts for one reason or the other. A Tax-Free Saving Account provides them with huge benefits in that they can allow them to reduce the tax drag on their investment earnings. In the past, investors used to pay dividends and capital gains which in return greatly affected the long-term returns on their investments.

Emergency funds

Emergency funds are not a necessity. However, those people who have considered getting these funds stand to gain a lot with TFSA. Before, these funds used to come with high taxes which then automatically made them inefficient. The introduction of TFSA changed things. The tax sheltered accounts mean that individual is protected from making such high tax payments.