Although tax-free savings accounts (TFSAs) won’t be implemented until January 2009, employers need to start thinking how, or if, this new savings vehicle will complement the current suite of defined contribution (DC) products they offer, according to Ross Gilbert, pension principal with Morneau Sobeco.

“It’s important to position this product effectively with employees and explain the pros and cons,” he said at a TFSA seminar Wednesday at the Fairmont Royal York in Toronto.

The Basics

The contribution limit for 2009 will be $5,000 and will increase based on inflation. Limits are not based on income earnings as with registered retirement savings plans (RRSPs).

Contributions made to a TFSA are made after tax, all earnings are sheltered, and withdrawals will not be taxed. Withdrawals from a TFSA will increase contribution room, and should someone want to make a contribution to their spouse’s TFSA, contribution room is based on the spouse’s room, not the contributor’s.

These new savings accounts are designed for robust investments, more so than just a regular savings account at the bank, and any RRSP-eligible investments are also eligible for a TFSA. However, unlike an RRSP, TFSA withdrawals don’t need to be repaid. Additionally, TFSAs don’t affect a person’s eligibility for federal means such as Old Age Security and employment insurance.

Still, like other investments, funds in a TFSA are not secure. And, because investments in a TFSA don’t count as income, a capital loss can’t be taken should money be lost on investments. Also, because the contributions are made after-tax, there are no immediate tax breaks as with an RRSP.

Target Group

“We think that TFSAs are for everyone. Regardless of income, or lack of income, they are appropriate,” said Joy Sloane, benefits partner with Morneau Sobeco and co-presenter at the seminar.

Those in higher tax brackets can use this as a tax-savings vehicle while lower income earners at the beginning of their careers can use a TFSA to save for short- term goals (such as a car, vacation, etc.) and use their RRSP room when they are in a higher tax bracket.

Also, as the cost of providing retirement benefits goes up as legislation changes, employers may want to present TFSAs as an alternative way of paying for post-employment health and dental costs, suggested Gilbert. Additionally, TFSAs can be promoted as tools to save for maternity or parental leave, or even a sabbatical.

Although all the details haven’t been worked out, TFSAs must adhere to the CAP Guidelines and will need to be managed. That means employee education and communication is imperative.

“Employers can use this to assist any [HR] strategies they may have,” Gilbert said. “It’s certainly an exciting time for employers to look at these vehicles.”

Read more about TFSAs in the May issue of Benefits Canada magazine.

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