As we come closer to the end of 2012, allow us to share one more good thing that you can do to help you achieve your goal towards financial independence. In 2009, Ottawa introduced the Tax Free Savings Account (TFSA) with an increased $5,500 annual limit starting January 2013.
In an article in The Toronto Star, here are some things you need to know about them:
1. How do they work? Unlike an RRSP, the contributions are not tax deductible. So you deposit after-tax cash into it, but you can withdraw it tax free.
2. Forever tax free. You never pay tax on the money inside your TFSA. When you take it out, it's still tax free and it won't affect your eligibility for income support programs based on earning levels.
3. Beware of over-contributing. There are hefty tax penalties if your over contribute so be mindful of your limits. Over-contribution mostly happens when you withdraw a certain amount and re-deposit within the same year. In most cases, the redeposited funds is considered a double payment.
4. You can carry forward the unused portion to the next year including amounts that you have withdrawn the previous year. For example, if you withdrew an amount you used to pay for a vacation, for example, the chunk you took out is added to the $5,500 that you're allowed for the new year. Just be careful NOT to reinvest during the same calendar year.
5. Contributions carried forward. You can take advantage of your unused portions of the annual limit at any time in your life. It is never too late to start saving on a TFSA and you're allowed to take advantage of the full use if your unused annual maximum amount.
To read the full article, click here.