There are many financial products designed to help you save money and accumulate wealth, and a recent and popular one is Tax Free Savings Accounts (TFSA). The beauty of this savings vehicle is that your contributions can grow, yet unlike an RRSP, you can withdraw funds when needed – tax-free.
However, many Canadians misunderstand some of the finer points of their Tax Free Savings Accounts, which can lead to less growth and even penalties. Are you making any of the following mistakes?
- Max it out: When they were first introduced in 2009, you could contribute a maximum of $5000 per year to your TFSA. This limit was raised to $5500 in 2013. Are you maximizing your contributions for full growth potential?
- Watch your withdrawals: Withdrawing funds and then recontributing to your TFSA within the same year can cause you inadvertently to over contribute, as per TFSA rules. You could be subject to financial penalties.
- No tax deductions: Unlike your RRSP, you cannot claim tax deductions on your TFSA contributions. Make sure you are investing appropriately for optimal savings.
- Successor holder versus beneficiary: While many people name their spouse as their beneficiary, it may be more beneficial that, when possible, you list your spouse as your successor holder instead. Why? First, your spouse will automatically become the new holder of your TFSA account upon your death. Next, not only will the TFSA continue to exist, but its value at the date of your death, along with any income earned after that time, will be sheltered from tax implications. Finally, listing your spouse as the successor holder eliminates the need for any administration required to retain the tax-free status of the TFSA funds that occurs when your spouse is named as the beneficiary rather than the successor holder.
- Born in the USA: Did you know that if you are an American citizen or are a green card holder, and have a TFSA, then you must report your income, including that from your TFSA, to the Internal Revenue Service? How much tax you may need to pay will depend on your particular situation. Learn about foreign tax credits that are available to reduce what you may owe.
When their implications are fully understood, Tax Free Savings Accounts can help your wealth grow significantly. When unsure about certain aspects of your TFSA, ask questions and get informed. Your knowledge creates personal financial power.