Tuesday, February 26, 2008

New Tax Free Savings Plan

I like what I heard in the budget about being able to set aside $5000 a year for savings and have the interest and capital gains not taxed. As it stands, the money that you have paid taxes on already gets taxed a second time if you save it. This really is a disincentive to saving money.

The form allows you to take money out without any taxes owing and you can repay what you took out. Also, your contribution room rolls over from year to year.

This will make possible for people to hold larger and larger tax free wealth. RRSPs have only been a tax deferral system. This truly makes a major change to the benefits of saving.

If you manage to put aside $5000 a year for 10 years, you have contributed $50 000 and should have seen another $50 000 in profits and capital gains. You now have $100 000 in the bank that could producing $8 000 a year tax free. In 20 years you could be sitting on $300 000 with a tax free income potential of about $25 000 a year. $25 000 a year from a RIF will shrink do to taxation so you might be better off building up this tax free savings account and not your RRSP.
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