What is a Tax Free Savings Account (TFSA)?
A tax free savings account (TFSA) is a secure way to invest in your future, tax-free. TFSAs present two major benefits: First, any income you earn on your TFSA contributions is tax exempt, and second, you will not be taxed on any of your TFSA withdrawals. This makes a TFSA a flexible alternative to other government-sponsored plans like RRSPs or RESPs, which have stricter rules around withdrawals and taxation.
How do TFSAs Work?
Any Canadian 18 years of age or older can open a TFSA. Because of their flexible nature, TFSAs can be used for a variety of purposes. Some people choose to use their TFSA as a high-growth savings account. With a TFSA tied to a Guaranteed Investment Certificate (GIC), you can be assured that your savings will grow at a steady rate and remain free from taxation. Since TFSA rates are generally higher than interest rates for regular savings accounts, this is a great way to grow your savings quickly and securely.
Just because it’s called a savings account, however, doesn’t mean your TFSA can only be used for cash savings. Many people use their TFSA as an investment account for a variety of eligible investments such as stocks, bonds, or mutual funds. This is a smart way earn investment income without being taxed on your earnings.
The current TFSA contribution limit is $10,000 annually (although that will likely be reduced to $5,500 in the coming years), and $41,000 in total over the life of the account. However, if you make less than the maximum annual contribution, you can carry the remaining amount forward, increasing the next year’s contribution limit. Unlike an RRSP, there is no time limit on when you can contribute to your TFSA; the only requirement is that you stay within the annual limits. You can also keep your TFSA open as long as you want, assuming you don’t exceed the maximum contribution limit. Again, this is in contrast to RRSPs, which must be closed once the account holder reaches age 71.
There are other TFSA rules to be aware of as well, including rules governing transfers to and from different types of accounts, and rules concerning foreign taxation. Want to know more? Our financial advisors can tell you everything you need to know about what you can and can’t do with a TFSA.
Want the latest information on TFSA-eligible investments? Stuck in the TFSA vs RRSP debate? Want to know the best way to use your TFSA to grow your wealth? For answers to these questions and more, contact one of our Financial Planners today!