The Original and Overlooked Tax-Free Savings Account

The Tax-Free Savings Account will provide Canadians with a powerful incentive to save. This flexible, registered, general purpose account will allow Canadians to watch their savings grow tax-free. It is the first account of its kind in Canadian history. --- Jim Flaherty, Finance Minister

The government is once again using tax incentives to encourage Canadians to save. This time with after-tax dollars in the new Tax-Free Savings Account (TFSA). That's terrific.

What if you want to go beyond the restrictions of another registered plan? Let's dive in and see what the wealthy already do.

The Good News

This [the Tax-Free Savings Account] is the single most important personal savings vehicle since the introduction of Registered Retirement Saving Plans in the 1950s." --- Jim Flaherty, Finance Minister

As you probably know, the TFSA provides

• tax-free growth
  
• tax-free withdrawals
• withdrawals at anytime
• permanent contribution room (can use unused capacity in the future and amounts withdrawn can be re-contributed later)

The Drawbacks
There are drawbacks

• maximum annual contribution of $5,000 (when growth is tax-free you want to invest as much as possible as soon as possible)
  
• no relief for small business owners or incorporated professionals for the onerous tax on passive investment income (reduced on Jan 1, 2008 from 49.8% to 48.7% in Ontario. Lowest in Alberta but still 44.7%.)
• not available until 2009
  

These drawbacks hurt Canadians who have wealth or are on the road to wealth. Fortunately, they can continue to use the original --- often overlooked --- Tax-Free Savings Account, cash value life insurance.

Going Beyond The TFSA
With universal life insurance, you get

• unlimited contribution room (based on the death benefit you choose)
  
• tax-free growth (until withdrawn, but there's an alternative to withdrawals)
• tax-free income (by assigning the cash value to a bank for tax-free loans which the tax-free death benefit repays)
  
• consistent treatment for individuals, small businesses and incorporated professionals
• nonregistered
  

The accountant-approved tax planning I see often has annual investments for 3-5 years of $50,000 to $500,000 --- well beyond the scope of the TFSA.

Links

• source of quotes (Ottawa Citizen)
• Federal Budget 2008: Tax-Free Savings Account (Million Dollar Journey)
• The Ideal Investments for Tax-Free Growth
• The Overlooked Advantages of Universal Life