The TFSA – Tax-free Savings Account, is another option for saving money while avoiding taxes. Despite the name which would indicate a Savings Account, a TFSA can offer much more. In fact, this is an Investment Account, since it’s designed to hold interest, dividends, mutual funds and a few other types of investments. There are a few conditions for opening a TFSA account, such as a minimum age, contribution limit, and withdrawal and redeposit rules.
All Canadian residents over 18 years old can open a TFSA account if they hold a valid SIN. In provinces where the age of maturity is 19, this will be the minimum age for opening the account. However, you will accumulate the contribution limit from the time you are 18.
The contribution limit is annual and updated along with future inflation in $500 increments. For 2017, the contribution limit is $5,500. If you never reached your limit, the amount unused for your previous years is accumulated and available for you to use at any time.
For individuals that became residents of Canada after 18 years of age, the contribution limits will count from the year after the residency has been issued.
These are the contribution limits, starting from the product’s implementation year:
|Year||Annual Contribution Limit|
The best way to find out your TFSA contribution limit is online at cra-arc.gc.ca or by calling the Tax Information Phone Service (TIPS) at 1-800-267-6999.
Different than the RRSP – Registered Retirement Savings Plan, where your taxes are deferred to the moment you start withdrawing the money from your account, the TFSA is tax-free anytime you withdraw money. You can also reinvest the amount you removed from your account after the year you withdraw.
Let’s say that you have $5,500 invested in a TFSA and you withdraw $1,000. Next year, you’ll have the new contribution limit plus the $1,000 removed from your account, it means that you are allowed to invest a maximum of $6,500 that year.
Do not contribute over your limit. Excess contributions to your TFSA will be taxed at 1% on the contribution, per month, until you remove it. This taxation will make you lose a huge part of your account income.
Also, it is important to research the TFSA options your bank can offer. No, they are not the same everywhere. Each bank has a portfolio of investments that you can choose to invest your money in a TFSA with different incomes. There are mutual funds holdings, the stock market, bonds, and dividends, guaranteed investment savings options and much more. And the interest paid variation is significant.
The TFSA is an excellent idea for emergency funds or saving for short and medium-term goals. It has a better return on your investment than a savings account, and it is possible to withdraw money anytime without a penalty, unlike an RRSP.
Learn more about the TFSA on the government website.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.