OTTAWA - Ottawa says Canadians will be able to be able to contribute an additional $500 a year on their Tax Free Savings Accounts starting Jan. 1.
That means Canadians can put in $5,500 a year, with any investment income earned not subject to taxation while it remains in the TFSA.
When the TFSAs were created in 2009, the government said it would index the contribution limit to inflation in $500 increments.
The Jan. 1 increase will be the first adjustment in the contribution limit.
The government says about 8.2 million Canadians have opened a tax-free account.
It says 2.5 million Canadians contributed the maximum $5,000 amount last year.
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What is the TFSA?
The <a href="http://www.tfsa.gc.ca/" target="_hplink">Tax-Free Savings Account</a> (TFSA) came into effect on January 1, 2009. Any Canadian aged 18 or older can invest $5,000 each year in the account and any capital gains earned on the money will not be taxed. Money can be withdrawn from the account at any time.
Who's Using The TFSA?
The measure has been popular, but who is benefitting most has become a matter of fierce debate. In just under three years, 41 per cent of eligible Canadians have opened a TFSA. Nearly half, 46 per cent, of those who earn more than $100,000 per year have opened one, more than in any other income group, according to <a href="http://www.newswire.ca/en/story/851833/three-years-later-majority-of-canadians-still-unclear-about-tfsas" target="_hplink">a survey recently conducted by Angus Reid for ING Direct</a>. How much money has been deposited by each earnings group remains a mystery. "I think the evidence shows that that's the kind of tax change, that while it's sold to the public as providing more choice and opportunities and everything else, really the only people who can benefit from it are the ones that have enough disposable income," <a href="http://www.queensu.ca/news/media/experts/beach-charles-m" target="_hplink">says Charles Beach, an economist at Queen's University</a>. "Someone who's unemployed or living on low income, they simply don't benefit from that. So that's the kind of tax cut that I think favours those with the higher income."
TFSA Lifts All Boats?
The Fraser Institute's Niels Veldhuis points out data on the TFSA remains scarce and that we shouldn't rush to judgment. That said, he argues that any vehicle which leads to more savings must be good for the economy. "It is positive regardless who is using it. The more savings we get, the more investment we get, the better off we all are." It's a matter of "fundamental economics," asserts Conservative Minister of State for Finance Ted Menzies. "Investments put in a bank are utilized by the banks to lend out to grow other businesses."
A 'Lunatic' Policy?
Armine Yalnizyan, senior economist at the Canadian Centre For Policy Alternatives (CCPA), questions the supply-side argument that savings will translate into investment and investment into jobs and economic growth, especially since the TFSA was introduced during the "nadir of the economic meltdown." She argues consumer demand is more important than investment for stimulating growth. "In the middle of this economic calamity, the federal government introduces a measure that does the opposite of what every other nation around the world is trying to do, which is to stimulate aggregate demand. Instead the government is favouring a program that tells people to pull money out of the economy. Stop spending, start saving. That is lunacy, there is no other word for it."
More And Bigger TFSAs
Soon, Canadians will likely get the chance to put away even more money into their TFSAs. The Conservatives promised during the last election campaign to increase the annual contribution limit to $10,000 per year once there is a return to balanced budgets.
Keep Some Wiggle Room
The key, Jarman says, is to live on less than you earn. Keep some wiggle room for youself so you don't spend close to or above your limit. When you get your next paycheque, try to save more -- at least three to ten per cent -- and spend less.
Get Used To Saving
Save, even if it's just a few dollars at a time. As you start your career, paying down student debt and planning major purchases like a car or first home can make it difficult to save. The trick is to incorporate savings into your budget before you get accustomed to spending it every month, Jarman says.
Emergency Funds Are For Emergencies
"As a general rule of thumb, an emergency fund should be about three times your monthly expenses if you are single, and six times your monthly expenses if you are married or have children," Jarman says. Opening a high-interest savings account will help you earn money through interest.
"D" Is For Discipline -- Not Debt
Organize your debt in order of interest rates and pay off the debt with the highest interest rates first. You may also want to consider consolidating all of your loans under one umbrella, with a lower interest rate if you can, Jarman says. Make your payments on time and, when you can, pay more than the minimum payment. Missing payments can hurt your credit score and should be avoided at all costs.
Let's say that, on average, you spend $10 a day on lunch. That's $50 a week and $2,600 a year. If you earn $30,000 a year, for example, you would save up to nine per cent of your salary by preparing lunch at home, Jarman says. Saving on these simple costs leaves you more money to save with a RRSP (Registered Retirement Savings Plan) or TFSA (Tax-Free Savings Account).