The 5 Key Benefits of a Tax Free Savings Account for the Self Employed
Here at One Stop, a good chunk of our customers are cut from the freelance cloth. We work with general contractors, restauranteurs, and entrepreneurs from every walk of life. Their work is demanding, with long hours and the toughest boss imaginable.
The boss looking back in the mirror each morning.
We have a lot of admiration for people who choose the self employed lifestyle, so we do our best to help when reality inevitably sets in.
You see, it’s not all perks like setting your own schedule and choosing a wage you want to make - you have to put in the prerequisite work to qualify for those perks.
One major disadvantage, or advantage, depending on your perspective, of being self employed comes during tax season. Employees in Canada are docked a certain amount from their pay cheques every week to cover federal and provincial taxes, not to mention your CPP. So at the end of the fiscal year, employees have some work to do to organize their taxes, just not nearly as much as the workload of a subcontractor.
If you’re self employed, the month of April was probably spent organizing receipts and expenses. Expenses incurred as a result of one’s business can be written off. It takes a lot of extra work, but the more eligible expenses uncovered, the less the freelancer will need to pay the government.
Enter the TFSA.
Hide Your Income
Ok, that’s probably not the best way to say it, but the idea is the same. Investing your income in a tax free savings account protects it from future taxation. You don’t have to pay tax on that income after it’s invested and you don’t have to pay tax on it when you withdraw. Unlike an RSP or other deferred tax, the money you invest in a TFSA is yours to put away for a later date.
You can withdraw funds at any time without penalty of tax, so you can buy a new car or a new house or contribute to a downpayment.
No Requirement of Income
There are plenty of savings options out there that might have great potential for gains in the future, but they require a set income or a minimum contribution amount. For subcontractors, not to mention retirees or stay-at-home parents, TFSA’s allow you to contribute whatever you want without any tax consequences down the road.
Learn more about specific TFSA rules over at intuit.ca
A TFSA does not reduce your taxable income, so if you have a great financial year then you’re still going to pay taxes on that income. However, according to Wes Beharrell, a certified financial planner with Investors Group, “your deposits are after-tax dollars, (and) once in a TFSA, any withdrawals, capital gains, dividends and interest remain tax-free.”
There are always stipulations based on an individual’s circumstances, but TFSA’s have been steadily gaining popularity in Canada since they were instituted in 2009.
Have questions about your savings? Give us a call!