Tax Free savings account
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| Tue, 12-16-2008 - 10:06am |
Bex I'm just reading your last post about the tax free savings account and how you intend to use it as an emergency fund and take funds in and out (potentially). If you take some money out and then want to put it back, you will "hold" it in ING until the following year. I'm somewhat mathematically challenged, but I thought the point of the tax free savings account was that over time it is saving tax on the compounding interest that was the advantage. So if you are taking money out of an account where you are not paying tax on the interest, then putting money back into a holding account that you do have to pay tax on the interest, it seems like it is not to the best advantage. I'm thinking/wondering does it not just make more sense to use an ING account as your e-fund and leave whatever funds that you deposit in your tax free account because all your interest, as it compounds, is going to be tax free...?
I am not trying to criticize but rather to open discussion because I don't understand the tax free account. When it was first announced it was given a bad review in my Economist-reading family because the amount of tax you save on interest on $5,000/year is actually really minimal. Hence my initial disinterest. Oh, and ING was offering an incentive where if you opened a tax free savings account they would double your interest between the date of deposit and Dec. 31...

No worries! I just saw a post about this from another poster which is what brought it up!
I don't think I explained myself well enough! You are absolutely correct. Moving funds in and out of the TFSA isn't the best move in the long run. However, given that I am just at the point of completing debt reduction, I won't have enough money to fully fund the TFSA AND an emergency fund. So for the first few years, the TFSA is going to have to double as my efund :)
My logic is that if I can put away $500 a month, thats $6000 a year. I would rather put the first $5000 in a tax free account to grow tax free and hope I don't need it. The other $1000 will go into an ING account.
Bex -
That is much more clear and makes total sense.
My question would be if you take money out of the TFSA and then have to wait until the following year to put it back, do you get that room *plus* the $5,000 limit for the next year?? Say you take $1,000 out of the account and have to wait to the next year to replace it. Are you then able to put $6,000 into the account? Anyone know?
I called ING over the week-end to understand the tax-free account. Yes, if you pull money out of your account this year, you contribution will be more than the $5000 ($6000 in your example).
I agree that you are not going to save a tonne of money as you won't gain all that much interest with $5000. But, I'm still opening one, and I will save my Emergency Fund in there. I am using it as a goal to have the $5000 in there by the end of the year.
If they keep increasing the contribution levels, eventually you will be able to save a little on your taxes. Also, you can fund GICs or Mutual Funds (although losses will not be tax deductable)
Tara
Thanks for the info Tara. Thats a great point about the mutual funds! I think then what I will aim for (say 5 year plan) is to save 6 months of living expenses in the savings account and then start funding a tax free mutual fund as a retirement tool. I checked and you can have as many tax free accounts as you want, but the total contribution to all of them can't be more then $5000 a year!
Thanks again!
Bex -
"Yesterday is history, tomorrow is a mystery, today is a gift -thats why its called the present."
Bex -
I haven't read all the posts in this thread so if I'm out to lunch then forgive me.
My bank phoned me regarding these tax free savings accounts. The bank lady said that they were more geared toward people who max out their RRSP contributions and want to stuff money somewhere else.
I opened up a PC Financial bank account as my "emergency" fund. On a balance of $1000 or more....they give you an
I think you would get more tax benefit by maxing out your rrsp first, assuming you also have an emergency fund to take care of yourself too.
I checked the rates between ING and PC Financial last night and except for the tax free savings account, ING has better rates. Their rate for tax free account is 1.05% higher than ING, but their other savings accounts are lower. Regardless better than the bricks and mortar banks that pay nothing.