Since its introduction in 2009, the tax-free savings account (TFSA) has become an essential tool for Canadians looking to grow their savings. This versatile account offers unique tax advantages that can benefit individuals across various financial situations and life stages.
This article presents 20 key facts about TFSAs that every Canadian should know. From contribution limits and investment options to withdrawal rules and estate planning considerations, I will cover crucial information to help you maximize the benefits of your TFSA.
TFSA Introduction
The Tax-Free Savings Account (TFSA) was introduced in 2009 as a new way for Canadians to save money. It’s designed to complement existing registered savings plans like RRSPs. The key feature of a TFSA is that any money earned inside the account is not taxed, even when you withdraw it.
Age Requirement
To open a TFSA, you must be at least 18 years old and have a valid Social Insurance Number. However, in some provinces where the age of majority is 19 (like British Columbia, New Brunswick, Nova Scotia, and Newfoundland and Labrador), you may need to wait until you’re 19 to open an account.
Residency Requirement
You need to be a resident of Canada to contribute to a TFSA. If you become a non-resident, you can keep your existing TFSA and continue to earn tax-free income, but you can’t add new contributions. Any contributions made while non-resident will be subject to a 1% per month penalty tax.
Annual Contribution Limit
The government sets a limit on how much you can contribute to your TFSA each year. This limit changes over time. For 2024, the annual contribution limit is $7,000. This amount is indexed to inflation and rounded to the nearest $500.
Cumulative Contribution Room
If you’ve never contributed to a TFSA and were at least 18 years old in 2009, you have accumulated $95,000 in total contribution room as of 2024. This is because unused contribution room carries forward from year to year.
Carrying Forward Unused Room
If you don’t use all your contribution room in one year, it doesn’t disappear. You can use it in future years. There’s no time limit on how long you can carry forward unused contribution room.
Over-Contribution Penalty
If you contribute more than your available TFSA room, you’ll be charged a penalty of 1% per month on the excess amount. This penalty applies for each month the over-contribution remains in your account. It’s important to keep track of your contributions to avoid this penalty.
Variety of Investments
TFSAs are flexible in terms of what you can hold in them. You can have cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), guaranteed investment certificates (GICs), and certain other qualified investments. This allows you to tailor your TFSA to your investment goals and risk tolerance.
Foreign Investments
You can hold foreign investments in your TFSA, such as U.S. stocks. However, foreign dividends may be subject to withholding taxes by the country where the company is based. These withholding taxes can’t be recovered in a TFSA, unlike in a non-registered account.
Tax-Free Growth
Any money your investments earn inside a TFSA, including interest, dividends, or capital gains, is not taxed. This allows your investments to grow faster than they would in a non-registered account where you’d have to pay tax on investment income each year.
Tax-Free Withdrawals
You can withdraw any amount from your TFSA at any time without paying taxes on it. This makes TFSAs very flexible for both short-term and long-term savings goals. You don’t need to report TFSA withdrawals as income on your tax return.
No Tax Deduction for Contributions
Unlike RRSPs, you don’t get a tax deduction when you contribute to a TFSA. Contributions are made with after-tax dollars. However, the tax-free growth and withdrawals can often make up for this, especially for those expecting to be in a higher tax bracket in retirement.
Flexible Withdrawals
You can take money out of your TFSA at any time, for any reason, without penalty. There are no restrictions on when you can withdraw or what you can use the money for. This makes TFSAs useful for both long-term savings and shorter-term goals.
Regaining Contribution Room
When you withdraw money from your TFSA, you don’t lose that contribution room forever. The amount you withdraw is added back to your contribution room, but not until the beginning of the following calendar year. This rule allows for great flexibility when using your TFSA funds.
Multiple TFSAs Allowed
You can have more than one TFSA account, and you can have TFSAs at different financial institutions. However, your total contributions across all your TFSA accounts must not exceed your personal contribution limit. It’s your responsibility to keep track of your total contributions.
Transfers Between TFSAs
You can transfer money between TFSAs without affecting your contribution room, as long as it’s done as a direct transfer. If you withdraw from one TFSA and contribute to another, it will count as a new contribution and could lead to over-contribution penalties.
TFSA as Loan Collateral
Unlike RRSPs, you can use your TFSA as collateral for a loan. This can be useful if you need to borrow money but don’t want to withdraw from your TFSA and lose the tax-free growth. However, be cautious about risking your savings this way.
Naming a Beneficiary
You can name a beneficiary for your TFSA. This can help avoid probate fees on these assets when you pass away. The beneficiary will receive the funds tax-free, but they will not inherit your TFSA contribution room.
Successor Holder for Spouse
You can name your spouse or common-law partner as a “successor holder” of your TFSA. This allows them to take over your TFSA upon your death without affecting their own TFSA contribution room. The TFSA continues to grow tax-free under their ownership.
TFSA and Government Benefits
Money in your TFSA and income earned from it doesn’t affect your eligibility for federal income-tested benefits and credits, such as Old Age Security, Guaranteed Income Supplement, or Employment Insurance. This makes TFSAs an excellent savings vehicle for low-income Canadians.
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