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A new way to save for retirement – tax free

Money. You earn it, save it and spend it. Starting January 1, 2009, you also get to keep more of it tax-free.

The federal government has introduced the Tax Free Savings Account (TFSA). Under the new plan, Canadian residents aged 18 or older with a social insurance number can open a TFSA and contribute up to $5,000 per year. The TFSA is a highly flexible savings plan that can be used for any purpose at any time — from a major purchase to a vacation to building up your retirement nest-egg.

“It doesn’t get any better than this,” says Patricia Lovett-Reid, Senior Vice President, TD Waterhouse. “Income and growth in the account are not taxable, and any withdrawals are also tax-free. Withdrawals are added to your contribution room in the following year and unused contribution room can be carried forward indefinitely. This is very attractive to investors in all life stages.”

Unlike a registered Retirement Savings Plan (RSP), your contribution room is not based on earned income, and there is no upper age limit for contributing to the plan. The accumulated savings can also be bequeathed tax-free to your beneficiaries as part of your estate.

According to Lovett-Reid, the TFSA is the perfect complement to an RSP or registered Retirement Income Fund. “It can provide an additional source of tax-free income without affecting government benefits such as Old Age Security. You get peace of mind knowing that you can access the TFSA tax-free without being bumped into a higher tax bracket, or worrying about the impact on your other benefits.”

Retirees profit in others ways as well. If they receive more RIF or pension income than they need, they can contribute the excess to their TFSA and benefit from the tax-free income and withdrawals.

“The TFSA is a new savings tool that everyone can benefit from immediately and over the long term,” concludes Lovett-Reid. “Its flexibility, tax-free withdrawals, and the ability to contribute up to $5,000 every year regardless of your income level, and even throughout your retirement, make it a must for any savings or retirement plan.”