Gordon Powers

Canada's Tax-Free Savings Account is now a year old but it appears that most investors still aren't taking advantage of its tax-free potential. Just one in five households has opened a TFSA in the last 12 months, according to BMO Capital Markets.

But being part of that 80 per cent isn't the end of the world. Unlike certain tax breaks that dry up in December, the TFSA rules allow you to play catch up. Whenever you don't make the full annual $5,000 contribution, you can carry that contribution room forward and use it any time in the future.

You can also contribute to a spouse's TFSA without affecting your own contribution room. Income attribution rules, which currently govern RRSPs, don't apply here.

Nor do you actually have to earn any income to be able to contribute, a boon for retirees. TFSA funds can come from a number of sources, including gifts, inheritances, lottery winnings, or tax refunds.

Yes, that initial contribution amount may seem small, but it's renewed annually and indexed to inflation where it will be rounded up to the nearest $500. And that happens every year, for life.

For example, assuming that the current inflation rate is two per cent, the TFSA dollar limit would remain at $5,000 for 2010 and 2011, but would increase to $5,500 for 2012. All of which means you now have $10,000 ($20,000 for a couple) to work with if you've yet to open an account.

Income earned within that account won't be taxed throughout your lifetime. Unlike with an RRSP, contributions aren't tax deductible, but there aren't any restrictions on the timing or amount of withdrawals — plus the money that's eventually taken out can be used for any purpose.

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Better still, money taken out of a TFSA may be re-contributed in the following calendar year and the amount withdrawn will actually be added on to your future contribution room.

Also, there's no deadline for re-contributing any amounts withdrawn. This differs from an RRSP where money taken out under the Home Buyers' Plan or the Lifelong Learning Plan has to be repaid within a certain time period or else the amounts withdrawn become fully taxable.