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A coworker was just talking to me about a new type of savings account the Canadian government has set up for ‘09, called the Tax Free Savings Account or TFSA.

I’m not much of a financial expert, but here’s what I know. An RRSP has limitations. While the contributions are tax-deductible, taking money out is taxable. This includes the original principle, and any interest. So you pay less tax in the end. However, RRSP’s have a lot more limitations and penalties than a TFSA. Here’s the basics of it:

• Anyone over 18 can open one
• You can put up to $5000 a year into it (this changes will increase to reflect inflation)
• You still have to pay tax on that $5k income
• If you don’t put $5k in a year, the extra “space” can be rolled over to the next year. For example, perhaps I can only put $2000 in this year. Next year I’ll be able to put $8000
• You don’t pay tax on any withdrawals, and there’s no limit to when you can take it out
• Taking some money out takes from that $5000 limit. So if you put in $2000, then later take out $1000 for some reason, you can still put in $4000 later in the year again.
• They can be inherited/passed on like other RRSPs and whatnot, and tax-free, too
• You can contribute to a spouse’s account, for example if you have a higher income
• It doesn’t affect benefits like Old Age Security or Child Tax Benefit

Again, I’m not a financial expert (not even close), but to me this seems a pretty sweet deal for someone to get into. Apparently they also have a good interest rate, as high as 6%, though I haven’t heard about that part expect from word-of-mouth. That’s better than my GICs, and I’m likely going to be transferring those over to a TFSA account when I get the chance. Especially since you can actually use the money if you need to.

You can check out all the details here: http://www.budget.gc.ca/2008/pamphlet-depliant/pamphlet-depliant2-eng.asp

Any commenters, please feel free to elaborate on this or correct me.