By financen | October 17, 2011 - 6:56 pm - Posted in Savings Account

The Conservative Party in Canada was first elected to a minority government in 2006, making Stephen Harper prime minister. Since then his Conservative Party has won federal elections twice, both times increasing the size of his constituency.

Finally, on May 2, 2011, Prime Minister Harper won a solid majority for the Conservative Party in the Canadian parliament. This trend towards conservatism at the national level in Canada has led to a number of changes designed to help investors and businessmen. In 2008, one of these changes was the introduction of the Tax Free Savings Account (TFSA).

A TFSA has several perks that allow Canadian savers and investors to earn reasonably high interest rates on their cash. In 2009, any Canadian aged 18 or older could open a TFSA and contribute up to $5,000 per year. The contributions are not tax-deductible, but the money in the account compounds tax-free and can be withdrawn tax-free.

Withdrawals can be made at any time with no withholding tax. Owners may contribute to a spouse’s TFSA, who can withdraw contributions tax-free, which enables income splitting strategies to be used. TFSAs are extremely useful tools for Canadians who wish to save their money. Increased savings may lead to increased investment, which grows the economy.

Another favorable aspect of a TFSA is the ability to re-contribute the full amount of the previous year’s withdrawals. This allows the total savings room in the TFSA to stay constant. Canadians can take advantage of the various TFSA offerings by financial institutions to find the one that best fits their needs.

Several institutions are offering high interest tax free savings account plans, allowing account holders to earn higher-than-usual interest on their money.

A TFSA allows withdrawals to be re-contributed in recognition of the fact that savers have multiple competing objectives, such as buying a house, saving for college and investing. These objectives have different time horizons, which is why the TFSA is structured as it is.

Furthermore, Canadians who do not use the full $5,000 contribution limit per year have their extra room carried forward. For instance, an account owner that only contributes $3,000 in 2010 has the extra $2,000 room carried forward into 2011. Now the owner can contribute up to $7,000 in 2011.

As to investment options, a TFSA allows a saver or investor to put his money in a variety of instruments. The TFSA can be used as a pure cash savings account with a high interest rate. Conservative investment options include Guaranteed Investment Certificates (GICs) and bonds. More risky investments open to TFSA owners are individual stocks, mutual funds, exchange-traded funds and segregated funds, which are offered by insurance companies.

The TFSA puts the decision in the hands of the account owner. They can invest their money however they choose and only pay taxes on the contributions into the account.

This entry was posted on Monday, October 17th, 2011 at 6:56 pm and is filed under Savings Account. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

Comments Off on How A High Interest Tax Free Savings Account Works

Comments are closed.