I am a big promoter of Tax Free Savings Accounts ( TFSAs). In Canada anyone with a valid social insurance number ( SIN), who is older than 18 in most provinces and 19 in some can contribute to a TFSA.

The great thing about TFSA is that it doesn’t just have to be a savings account. You can have a self – directed TFSA and can buy shares, bonds, units of mutual funds etc … Remember any income you earn in your TFSA in the form of capital gains, interest income , dividend income is not taxable.

Here are some other important points you need to understand about a TFSA :

• You can contribute up to a maximum of $5 000 CAD a year
• You can carry over previous year not contributed amounts to the next year .  So for example, TFSA’s started in 2009, and if you havent contributed anything so far, You would be able to open a TFSA account and contribute $15000 CAD ( $5000 CAD for each year ( 2009, 2010, 2011).
• If you contribute anything above $ 5000 in a certain year, you would be taxed at 1% on the amount above the $ 5000. So for example if you contributed your full $5000 in 2009 and you contributed $7000 in 2010, you would be taxed 1% on $2000 ( Extra $2000 contributed in 2010 ). 
• TFSA’s are not revolving. So if you contribute your full $5000 for 2010 in January, and you take out $2000, you cannot contribute that $2000 back for 2010.  At the end of 2010 the amount you contributed for 2010 would be $3000 + any gains you made in that money. This is one thing that I find to be annoying about the TFSA 🙂 . 
• TFSA accounts can be opened at any of the banks, there is no fee for the TFSA account.
• For the folks who like to trade in non-Canadian markets, currency conversion will occur each time you make a trade. You can only hold cash in Canadian Currency in your TFSA account. 
• Even in a self directed account any time you need to make a withdrawal from your account, you need to call the bank ( At least with Scotia , and I assume it will be similar for other banks ). I find this to be annoying as well.
• Similar to RRSPs your tax returns will have your available TFSA contribution room for each year.

To finish off, some numbers to demonstrate the value of a TFSA:

• If you are in the tax bracket of someone who makes between $40000 CAD to $80000 CAD
• And you make a $5000 CAD contribution to TFSA each year for 10 years
• Lets assume good things, and say you make 10% return each year
• You would save in taxes $8743CAD on your investment in TFSA
• Now if you had planned ahead and put your investments in a TFSA , now you have enough money for a fancy vacation or the latest of home theater system.

I hope you open a TFSA and save your money 🙂 !

The government of Canada has a great website with more infomraiton on a TFSA : http://www.tfsa.gc.ca/index.html

You can find a TFSA calculator here : http://www.tfsa.gc.ca/cal-eng.html