A Tax-Free Savings Account, or TFSA for short, is a registered account that was launched by the Federal Government in 2009 with the goal of helping you grow your savings without paying taxes on the interest or investment income you earn. Although they’re tax-free, the government keeps track of your contributions and the earnings you accrue on your investment. It’s a bit of a deceiving name choice as there are many different investments you can hold inside a TFSA, aside from a savings account. You may hold as many TFSA contracts (or accounts) as you want, as long as you do not exceed the cumulative contribution limit. Let me break it down:
| 2009 $5,000 | 2013 $5,500 | 2017 $5,500 |
| 2010 $5,000 | 2014 $5,500 | 2018 $5,500 |
| 2011 $5,000 | 2015 $10,000 | 2019 $6,000 |
| 2012 $5,000 | 2016 $5,500 | Total $63,500 |
Yes, it is a strange number, however at least they rounded up for simplicity and the limit isn’t $63,346.58. Keep in mind that you would need to be turning at least 28 years old this year to be able to use all $63,500 in contribution room, because you only accumulate contribution room and open a TFSA once you are 18 years old. If you have not opened a TFSA until today, you are free to contribute the entire amount all at once or gradually, whichever you prefer.
What happens if I need money from my TFSA?
We need to send a signed declaration to your local MPP’s office for the withdrawal and then hope for the best…
I’m going to assume you knew I was kidding and move on...
It’s actually very easy, in most cases, to withdraw from a TFSA. Compared to an RRSP, it’s even simpler which I'll explain in my next blog - stay tuned. You also get all your contribution room back each and every year if you have withdrawn funds. Since TFSA contributions are made with after-tax income (income you’ve already paid the tax man for), withdrawals do not have to be included in your income for tax purposes.
Example: Bill deposits $63,500 to his TFSA on July 22. He then realizes that he needs to clear up a minor jaywalking charge from years ago and needs $2,500. He can withdraw the funds but may not put them back in the TFSA until the following calendar year, or he will be deemed to have over-contributed and have to pay a penalty of 1% per month on the excess amount.
If you anticipate needing cash in the next year from your TFSA, you may be best served to make the decision in December as you will not have to wait long to replace the funds.
I get it, I can save some money on taxes…but really, why would I bother with a TFSA?
TFSAs have multiple benefits to them. Let’s look at some of them:
- Tax savings: As an example, if you invested just $100 monthly for 20 years with a 5% return, you would have almost $7,000 more earnings with a TFSA as compared to a regular taxable account (assuming $45-90,000 income range). Use the PenFi TFSA Calculator >
- Better for earners in the $50-60,000 range, as RRSPs provide minimal income tax saving benefits at those income ranges.
- You don’t ever have to take the money out during your lifetime if you don’t want to.
- If you do withdraw, it does NOT count as income and therefore will not reduce any government benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). This can be a positive financial planning feature for decumulation income strategies in retirement.
- Flexibility: As mentioned above, funds can be replaced in future years and there is no loss of contribution room, unlike RRSPs.
- TFSA funds can transfer directly to a spouse’s TFSA on death with no tax implications and no probate. This scenario and a spousal separation are the only 2 events that would allow someone to go over the $63,500 while still being inside CRA rules.
What it boils down to is TFSAs, whether you are saving for your dream vacation or your retirement, are a great addition to most investment portfolios. You can set up a regular contributions to your TFSA and allocate your funds to savings accounts, GICs or term deposits, or mutual funds - depending on the duration and your risk tolerance in your savings goals.
Ready to get started?
Contact your financial advisor or book an appointment online to review your financial goals and discuss how TFSAs fit your investment strategy.
Note Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.
