Updated: November 7 at 06:54 AM CST

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By now, I'm sure you've heard of the new Tax Free Savings Account, or TFSA. These are a big deal.

We wrote about it in this column last spring, but it seemed like a good time now to review the rules and uses, as you get ready to open up your TFSA in January 2009.

That's right; in spite of all the advertising and articles you are reading about the TFSA, you cannot put money into one now. I have received a number of e-mails and phone calls from people who think they've been left out, so I thought this clarification is timely.

However, a number of financial institutions are encouraging you to open them now, so you are ready to make a deposit with them early in the new year.

The TFSA will allow all Canadian resident taxpayers over the age of 18 to put up to $5,000 a year into a separate investment account that will be exempt from income taxes on its investment earnings. The annual limit will go up with inflation, in minimum $500 increments.

The TFSA is quite different from an RRSP in a number of ways. There is no tax deduction for putting the money in. There is no tax liability when you withdraw the money. Any withdrawal can be replaced by an additional deposit, but the replacement deposit must wait until the next calendar year. In other words, you do not lose any TFSA contribution room by making a withdrawal.

For example, if you deposit $5,000 to your new TFSA in January, then withdraw $2,000 for a vacation in March, you can deposit $2,000 back into your TFSA at any time.

If you don't do that until 2010, then your limit will have increased to $7,000.

Unused contribution room carries forward indefinitely.

You can use any investment vehicle that you could use in an RRSP. You can contribute existing investments in-kind, but it will be considered a deemed disposition and any gain incurred will be taxable and any incurred loss will be denied. So, if you have a capital loss you want to claim, sell the security and contribute the cash to the TFSA.

You will still have to wait 31 days before buying it back if you want to claim the capital loss.

You might consider the TFSA to be a complementary savings vehicle to your RRSP, or use it as an alternative, and decrease your RRSP contribution. This means more tax now, but less tax and no negative impact on income-tested government benefits after retirement.

There is also no tax on gains when the account owner dies.

Some investors and advisers think that the TFSA is a great place to put interest-bearing investments (bonds and GICs), sheltering this interest income which is normally subject to full taxation at that person's highest marginal tax rate.

Others think it's a great place to put speculative investments that have the potential for significant capital gains. An example here might be a junior mining stock, where a home run could turn a $5,000 investment into $25,000.

Wouldn't it be great to have that capital gain totally tax-free?

The fly in the ointment is that the capital loss you incur if it doesn't work out cannot be applied against other capital gains. So this is only a strategy for someone who can afford to lose the $5,000.

For people who have no RRSP contribution room because they do not have "earned" income (from employment or self-employment), or have a large pension adjustment, the TFSA may be particularly useful. For anyone holding cash reserves outside of RRSPs, it would seem like an obvious vehicle to use.

Every once in a while, the government gets it right.