If you haven’t already started saving for your future, now is the time. Not sure what TFSA means or its benefits? Well, you have come to the right place. Let us give you some pointers and help you to fully comprehend your saving options.
The TFSA – Tax-free savings account is a great financial tool available at no extra cost to build savings to put towards whatever you need when you need it; Maybe you are looking to buy a new house, a car or a puppy. It can also be available in case of an emergency or any other unexpected financial cost due to how unpredictable life can be these days. In Short, a TFSA allows you to establish savings without paying any tax on the growth within the account or on withdrawals. However, even since the government introduced the TFSA in 2009, about half of the Canadian’s, who have been surveyed, say they have not yet opened a TFSA.
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How Does A TFSA Work?
- TFSAs are only available to Canadians aged 18 and older.
- The annual contribution limit is calculated for inflation.
- You can deposit money into your TFSA any time, up to a set limit.
- You can save tax-free for any goal of your choice.
- No need to earn income to contribute
- You can take out money, for any reason, and when you want without paying any tax
- When you take out money, you can contribute the same amount, in addition to the annual maximum.
- In a TFSA, you can hold a variety of investments; for example, GICs, bonds, stocks, mutual funds and of course cash.
- It is legal to contribute to your spouse’s or common-law partner’s account as well.
- You do not have to open a TFSA or file a tax return to gain contribution room in your account.
- Opening a TFSA will not have an impact on any other government benefits or credits you may be receiving, such as EI (Employment Insurance) or Old age pension; Nor, will these be reduced.
Unfortunately, like most things in life, there are still some ways that you may get charged a tax on your TFSA: If you over-contribute for the year, investing in a non-qualified or prohibited asset, Opening and contributing to TFSA before being a permanent resident or Canadian citizen, or tax payable for an advantage such as benefits, loans or debts in relation to a TFSA.
Aspects of TFSA that You Need to Understand:
- It may be called a “savings account,” but it can hold much more than that. Traditionally, a savings account was a place to deposit your money safely and with low rates. But for TFSA, that description doesn’t even scratch the surface. Did you know that you are able to hold any investment in a TFSA that you can in a registered retirement savings plan (RRSP)? It is true, many Canadians are misled and confused by the name “savings account.” Maybe it should have been given a different name, however, a TFSA has a similar concept as an RRSP, you just need to choose the appropriate investment(s) that match the requirements.
- Re-contributing what you withdraw in a year is possible, but not until the following year. With the original rollout of the TFSA, many owners used their account as a regular savings account and unfortunately were penalized for over-contribution within a year. Therefore, regardless of the total accumulated amount in your account, each time you put funds in it counts as a contribution. So, say your limit for the year is $5000 and you decide to deposit $3000. A couple of months later you withdraw $3000, and again deposit $3000 at a later date in the same year. You are now considered to have contributed $6000 for that year, which is over your limit for contributions. This holds true even if you move your TFSA from one bank or financial institution to another or by withdrawing from one to re-deposit in another.
- You can not ever lose your TFSA contribution room. This is a great feature of the account. Even if you’ve never opened up a TFSA in the past, you can open one today and would be able to contribute up to $75,500- of course provided you’ve been over 18 since 2009.
- You don’t have to choose between a TFSA and an RRSP. This is great for anyone keen on saving for retirement. There are many creative ways to make your TFSA and RRSP work as a team to improve your wealth. As a general rule of thumb, RRSPs are a better choice for long-term goals such a retirement due to the fact that you have more limitations and you are eventually taxed on that money. Whereas with a TFSA, saving for a short-term goal works quite successfully and is usually what a bank manager would recommend.
*If you are unsure of what your best options are, remember, we are accounting and tax firms in Vancouver waiting to help you with all your questions. Don’t be afraid to ask for help, it will only stand in the way of you and your future.