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3 Things Every Investor Needs To Know About TFSA’s

Jon Williams here, from Williams Financial Group and Manulife Securities.

Today I'm going to be talking about tax-free savings account. It's a great vehicle for a lot of investors and it's very misunderstood.

I want to briefly talk about what are the advantages of a tax-free savings account, who should be utilizing them and, ultimately, what can you hold in them.

So let's, first off, talk about what are the advantages of a tax-free savings account.

Well, number one, any of the growth that happens from the holdings you have within the tax-free savings account are tax-free, just like what it sounds like. That’s number one.

Number two, you can also name a beneficiary on a tax-free savings account which means that this can help a lot from an estate planning perspective and transferring wealth between spouses as well as generations. So let's go more about the tax-free savings account. It's 2014 and this year's limit is 5,500 Dollars. Now, if you're a Canadian and you've been above the age of 18 since 2009, you have a cumulative maximum limit of 31,000 Dollars, which is a pretty substantial number. Often we have families that are clients of ours, and they are four as a couple, that 62,000 Dollars of money outside your RRSPs, they can be invested and managed on a tax-free basis.

So, who should be considering a tax-free savings account? Well, depending on your scenario, actually both low middle and high income investors should be considering these four different reasons. A low income investor doesn't necessarily get a whole lot of tax benefit from contributing to an RRSP because their tax rate may already be extremely low and, therefore, by contributing to a tax-free savings account instead can be a better tax advantage although everyone's situation is different. From a high income earners perspective, if they are re-maximizing their RRSP and they have no known registered investments, then utilizing their tax-free savings account will give them tax-free growth, therefore, helping them out from a tax planning perspective so that they're not incurring interest in account or capital gains on their non-registered basis.

Now, I want to talk briefly about what you could hold because it's extremely misunderstood. Most people say it’s a tax-free savings account; therefore, it's a savings account, obviously because that's what the name is. So a lot of investors in Canada simply have cash balances in their tax-free savings account and their underutilizing this as a product. Tax-free savings account in fact, can hold a number of different investments within them. A lot like an RRSP, and really the restrictions on them are very similar to an RRSP. So for instance, in a tax-free savings account, I can own stocks, bonds, mutual funds, ETFs; really there is a wide variety of investment choices you can own within a tax-free savings account. And my belief is that a lot of investors in my experience as well simply have their savings in these vehicles as opposed to having an investment vehicle, they can actually earn them something substantial. If I invest 10,000 Dollars in a tax- free savings account into a vehicle that has potential for capital gains and I make 3,000 Dollars on that vehicle, that 3k dollars literally is tax-free growth. I can take that 3,000 Dollars and out of that tax-free savings account and span it and there is zero tax impact. So if you really understand that that's how they work, perhaps you should be doing something different with your tax-free savings account in really utilizing that tax-free growth.

So, thanks very much for your time today. Have a great day and if you have any questions about your tax- free savings account or you would like a review of your investments, please feel free to reach out to us in William's Financial Group.