[MoneyGuy]

Originally Posted by Ronald Pagan

The only thing 'tax-free' about these accounts is the interest earned on them.

You still have to contribute to them from your net income.

If you think they're not worthy, I disagree totally. I write a financial column in a couple of newspapers. Here is one I've done.

A perfect new piggybank

When the much anticipated tax-free savings account (TFSA) hits the streets on Jan. 2, 2009, you’d be wise to open one straight away. Probably the best new investment vehicle since the launch of the RRSP in 1957, it has exciting planning opportunities.

Sadly, we’ve fallen out of the savings habit. However, the TFSA, which allows you to save for retirement or any other purpose on a completely tax-free basis, should rejuvenate Canadians’ savings efforts. The TFSA may over time match the impact of the RRSP. In other words, it`ll be huge.

Every Canadian 18 years of age or older will be able to contribute up to $5,000 per year to a TFSA; this amount is indexed annually. Unlike an RRSP, you get no tax deduction for your contribution. However, unlike RRSP withdrawals which are fully taxable at your marginal tax rate, you never pay any taxes on TFSA growth or withdrawals.

Unused TFSA contribution room can be carried forward indefinitely. Any amounts withdrawn are added back into your contribution room. This is an advantage over RRSPs, where withdrawals are forever and those monies can never be replaced.

The TFSA is incredibly flexible, making it attractive for anything from short-term savings to saving for retirement. If you pay taxes and have savings of any kind, you might consider flipping those savings into a TFSA.

Understand this about a TFSA: It’s not a product. It’s a means of sheltering various products from taxes. You can put guaranteed investment certificates, term deposits, stocks, bonds, mutual funds, segregated funds and cash savings into a TFSA.

So, how should you use the TFSA? First of all, this does not replace an RRSP. We’re falling behind in our retirement savings, and – for most of us – the registered retirement savings plan is the best way to amass the money you’ll need for a comfortable, worry-free retirement.

Which is best, contributing to an RRSP or to a TFSA? It depends. I think that the best use of the TFSA is for folks who have maxed out their RRSPs and want to set aside more tax advantaged money for retirement. However, few people max out their RRSPs, so the rest must decide between the two choices. The higher your income, the more RRSP contributions make sense.

When income is less than roughly $37,000, you probably shouldn’t be making RRSP contributions anyway, so here the TFSA wins. Unlike RRSP withdrawals, TFSA withdrawals don’t count as income so won’t affect income-based payments such as Old Age Security and the Guaranteed Income Supplement. Also, RRSP withdrawals, unlike TFSA withdrawals, might push you into a higher tax bracket in retirement.

This is a complex choice that requires more space than I have here. Speak with your financial planner.

One of the best uses of a TFSA is for high-risk, high-return investments. If you hit that home run, those big gains are tax sheltered. Unfortunately, if you have a capital loss, you can`t use it to reduce capital gains.

A TFSA is also great for short- and medium-term savings. If you’re saving for a new car, vacation, house or a child’s university education, the TFSA is a perfect vehicle. Don’t bother with conventional bank savings at low, fully taxable interest rates for short-term money; high-interest savings accounts currently pay about three per cent. For medium-term savings where you can take more risk, a bond fund might be a good choice. For long-term objectives, look at a stock fund.

Here is an example of how a TFSA can really shine. Let’s assume that you have $25,000 growing at four per cent in a non-registered account. Depending on your tax bracket, you may be losing $350, or more, of that every year in taxes. Remember that it`s much better when money compounds in your pocket instead of being sent to Ottawa. As you add to your TFSA over years and as it grows and grows, you keep every penny.

TFSAs provide wonderful income-splitting opportunities. You can give a non-working spouse the money for a contribution and the income doesn`t attribute back to you.

If you’re not excited quite yet about the huge opportunities within a tax-free savings account, get excited. The financial community is ecstatic because we see the potential; count on hearing from your financial planner soon.

If you have after-tax income that's getting any return, there is no reason not to put it into a TFSA. None!