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How to make tax-free accounts work for you

The Tax-Free Savings Account (TFSA), introduced in January, is thenewest savings vehicle for Canadians looking for flexible ways to growtheir nest eggs.

The Tax-Free Savings Account (TFSA), introduced in January, is the newest savings vehicle for Canadians looking for flexible ways to grow their nest eggs.

Here are some examples of how Canadians can benefit from a TFSA:

Flexibility seeker: Canadians interested in investing money each year, but reluctant to lock away assets long term for fear of unpredictable ad hoc expenses such as car repairs, home renovations or emergencies. The TFSA is an attractive alternative to taxable investment accounts.

Low-income investor: Typically younger Canadians in a lower tax bracket, these investors may prefer to forego up-front RRSP tax deductions in exchange for the tax-free growth from a TFSA — particularly if they expect to withdraw the money in future years when in a higher tax bracket.

Satisfied senior: Seniors with excess cash flow (possibly from mandatory Registered Retirement Income Fund (RRIF) payments) can use a TFSA to accumulate tax-free growth. And, withdrawals from a TFSA can be made without fear of reducing government benefits such as Old Age Security and the Guaranteed Income Supplement.

RRSP maximizer:
High income earners who are able to maximize RRSP contributions each year can invest excess assets in a TFSA for additional tax saving opportunities.

Income splitter: Married or common-law couples can use TFSAs to split income outside of an RRSP. Each spouse or common-law partner receives $5,000 of TFSA contribution room each year, even when the family earns one income. Unlike RRSPs, contribution room is not based on income earned.

 
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