There are many ways you can reach your savings and investment goals – and one of those ways is with the Tax Free Savings Account (TFSA). Introduced in 2009, a TFSA can help you save more money without having to pay taxes on interest earned.
This simple guide to Tax Free Savings Canada can give you quick answers about what a TFSA is, why you would open one, and other important details you need to know.
What is a Tax Free Savings Account?
A TFSA is a registered and general purpose savings vehicle that lets you save money in a tax-free account. This lets you achieve your savings and retirements goals faster and easier. It is intended to complement, and not replace, other registered savings vehicles such as an RRSP.
What are the Benefits of a Tax Free Savings Account?
With all of the savings and retirement products available, you may ask yourself why you would use a TFSA. Here are some of its benefits:
- Any dividends, interest, or capital gains earned in your TFSA are tax-free.
- Any money you withdraw from your TFSA is also tax-free.
- You never lose your unused Tax Free Savings Canada contribution room; it is carried forward and accumulates.
- Any money you withdraw can be put back in your TFSA in any year, assuming you have contribution room.
- The income you earn in your TFSA or any withdrawals you make do not affect your eligibility for Old Age Security, the Canada Child Tax Benefit, among other federal benefits and credits.
- In general, you can transfer to your spouse or common-law partner upon your death.
Who Can Open a TFSA?
In general, any Canadian resident, or any non-resident with a valid SIN, age 18 and older, can open a TFSA. You are allowed to contribute to the maximum limit for that year.
You can open more than one TFSA, but the total amount of your contributions in all accounts cannot exceed your contribution room for that year.
What Type of Investments Can I Have in My Tax Free Savings Canada Account?
You can include cash, ETFs, GICs, bonds, and mutual funds, to name a few.
What is the Maximum Amount I Can Contribute to my TFSA?
In general, you can contribute a maximum of $5,500 to your TFSA each year.
However, your contribution limit is determined by the amount of room in your TFSA. For example, if you contributed only $4500 in one year, then the remaining $1000 is carried over to the next year. Your contribution room for the next year is $6500.
Unlike an RRSP, you do not need to have an earned income to contribute to your TFSA. Just be sure not to make the mistake of over contributing.
Can I Withdraw Money from my TFSA?
Yes, you can withdraw funds without penalty. But you need to understand the ramifications of recontributing to your TFSA.
Any amount that you withdraw from your TFSA can be added back in the future. Keep in mind that recontributing in the same year as the withdrawal could result in an over-contribution, which would be subject to a penalty. Here is how it works:
Withdrawing money from your TFSA does not reduce the total contribution amount of TFSA contributions you have made for that year. Let’s say you contributed $3000, but later that same year, withdrew $2000. The amount of the withdrawal is ignored; you would still be allowed to contribute a maximum of $2500 to reach the maximum limit of $5500 for that year.
However, that withdrawal of $2000 would be added to the next year’s contribution limit, making for $5500 + $2000 = $7500.