What is a Tax Free Savings Account (TFSA)?
A Tax-Free Savings Account (TFSA) is an account introduced in 2009 for Canadian residents to make saving money easier. You are eligible to contribute the year you turn 18 years of age. There is a limit to the amount you can contribute yearly, which can be found here. Any unused contributions will be carried forward for future years. Whether you need money for an emergency fund, a vacation, tuition, a vehicle or a home, having a TFSA account can help you reach your goal.
Advantages
- Any interest, dividends and capital gains earned or withdrawn any time for whatever reason is not taxable for income tax purposes.
- The amount withdrawn will be added back to your TFSA contribution room balance the following year. For example, if Joe withdraws $20,000 anytime in 2018, then $20,000 will be added to Joe’s contribution room on January 1st, 2019.
- There are no fees to setup a TFSA account.
Disadvantages
- Similarly, any losses incurred in the TFSA is not tax deductible. The disadvantage is that contributing in excess of your limits will result in a fee payable to the CRA.
- You cannot day trade or the CRA may view it as a business and therefore the account will not be tax free.
- Contributions made are not tax deductible like an RRSP.
What can I hold in my TFSA?
Almost everything you can hold in a regular investment account can be held in a TFSA. Common investments include: cash, mutual funds, securities listed in a stock exchange, Guaranteed Investment Certificates (GIC) and bonds. So even if you do not want to take on any risk of losing money, you can always put cash in your TSFA and earn interest that is usually a higher interest rate than regular savings account, and not have to pay any tax on that.
Next steps
If you haven’t already, you can sign up for an account at your local bank or broker. If you have a TFSA account already, ask yourself if you have a plan in place to take advantage of this tax free account.
