Tax-Free Savings Account (TFSA)

TFSA or Tax-Free Savings Account is a government of Canada savings program initiated to encourage Canadians to invest more and take advantage of tax-free asset growth.

Did you know that over a third of Canadians aren’t aware of how Tax-Free Savings Accounts work? TFSA is rather ill-named giving people the impression that it’s just a savings account, but it is in actuality a tax-sheltered investment vehicle that Canadians should be taking advantage of.

As a Canadian citizen or resident, it is important for you to be well-informed of this lucrative tax-sheltered investment opportunity, so you can take advantage of this program, save more for your future and withdraw funds tax-free from your TFSA.

What Is TFSA and How Does it Work?

TFSA or Tax-Free Savings Account is a savings account, much like regular savings account that you may already have in a bank but with a bit of twist.

As the name suggests, this type of account is tax-free. You’re entitled to earn interest or capital appreciation inside a TFSA, tax free.

And yes, you can withdraw your capital contribution including all interest or money gained from inside your TFSA tax-free.

If you simply open a regular savings account, you will have to pay taxes on the interest earned every year your capital appreciates though obviously, your regular savings account won’t accrue much of an interest; at least not as much to keep up with inflation at the least.

A tax-free savings account, on the other hand allows you to invest in market portfolios, money market, GICs or other assets much like you would in RRSP.

How Much Money Can You Put in a TFSA?

Starting in 2009, all Canadian residents aged 18 or older could contribute a certain amount to their TFSA every year.

This amount depends on the budgetary plans by the Canadian Government and can vary; the limit was set at $5000 per year when the TFSA program started in 2009. This later increased to $5,500 in 2013, $10,000 in 2015 and is down to $5,500.00 from 2016 and has stayed there up to the time of this writing (2018).

TFSA Contribution Limits

As mentioned, yearly contribution limits vary depending on the year and is dependent on the government. Your individual TFSA contribution limit however, accrues every year from 2009 if you were already 18 years old at the time and is a valid resident of Canada.

CRA used to update all Canadian residents about their TFSA transactions and their contribution limits on their T1 Notice of Assessments. As of this writing, the CRA has stopped including TFSA Contribution Room on the Notice of Assessment.

In any case that you couldn’t max-out your TFSA contribution, you will be allowed to contribute more the next year as the balance of your previous years’ contribution room accumulates every year adding any unused contribution room to your current year limit.

For instance, you could contribute up to $5,500 in2018, and any unused contribution room from the previous years since 2009. You can contribute on a periodic basis like monthly or even by-weekly or if you prefer, you can contribute a lump-sum amount every year.

TFSA Over-contribution Penalty

When you exceed your TFSA contribution limit, you will be subject to an overcontribution penalty. The overcontribution penalty is 1% per month and is based on the amount of excess contribution.

Say, if your overcontribution totals to $2,000.00, your overcontribution penalty is $20 a month and you will be charged this penalty until you remove the overcontributed amount.

In the event of overcontribution, you can correct your situation and avoid taxes by withdrawing the excess amount immediately.

You can have the financial institution where you have your TFSA withdraw your over-contribution and deposit it to your chequing account.

TFSA Vs. RRSP

A lot of people aren’t comfortable with contributing to RRSP knowing that it is one of the highly taxed assets upon death not to mention the fact that it is 100% taxable upon withdrawal.

In the spirit of fairness, RRSPs offer you tax credits every time you contribute to your RRSP account. So, it just makes sense that the government will tax you on the withdrawal of accumulated amount of pre-tax dollars that you were not taxed every year your money grew inside the account but depending on your tax bracket, an RRSP account may or may not make sense.

The only clear benefit that one can take advantaged off an RRSP account is the income tax break that it offers every time you deposit money into your RRSP account and not much on the tax-free asset accumulation part. Meaning, if you’re not making at least $50,000.00 a year in net taxable income, opening an RRSP account may not benefit you as much tax-wise.

People who contribute large sums of money into their RRSPs do so to avoid high tax bills or to defer taxation of their active income legally. So, instead of being taxed right away, you can grow your money further tax-free and get a tax credit that you can offset on your taxable income for the year.

However, if you are not considered to be part of the “high tax bracket” group, an RRSP account may not serve you well as you wouldn’t have as much tax credit as someone who’s in the 40% income bracket range.

TFSA is the government’s answer to Canadians who don’t want to save up on their RRSPs because of the tax implication upon withdrawal.

The solution was to offer a similar account that allows people’s money to grow in interest and market rates of return without being taxed on the growth and they can withdraw all their money, including gains without a tax event.

Sweet! Only one caveat, you can only put in a limited amount every year or else you get penalized for overcontribution which to seem to be an average of $5,500.00 per year.

Having more money to save than what the government allow you to save on your TFSA is a good problem to have and there are a lot of tax-friendly asset accumulation vehicles that are available to you. We can discuss about your different options if you click to book an appointment here.

If you don’t already know, there is also a contribution limit on the RRSP side of the equation, only that it is much higher than the current $5,500.00 TFSA limit. The government allows us to contribute up to 18% of our income for 2018 into our RRSPs plus any carry-forward contribution room from the previous years and if you’re after the tax-savings that an RRSP account can offer, there seem to be more room for that! This is effective for higher income earning professionals.

How to Open A TFSA Account?

There are several ways on how you can open a TFSA. You can open one with a bank, a credit union, a mutual fund dealer or an insurance company.

All you must do is book an appointment at your convenience and bring in your social insurance number on the day of your appointment.

You will be asked some questions by your Winnipeg financial advisor to determine your risk tolerance through your investor profile.

After that, the advisor will guide you through the TFSA application.

You can contribute on a bi-weekly, monthly, annual or one lump sum.

Eligibility Criteria For TFSA:

Top open a Tax-Free Savings Account, the applicant…

  • must be 18 years or older.
  • must be a resident of Canada for tax purposes.
  • must hold a valid Social Insurance Number (SIN).

TFSA Withdrawal

You can withdraw money from your TFSA tax-free, anytime and from anywhere.

All you must do is call the financial institution and instruct them to transfer the amount you wish to withdraw into your chequing account.

The transfer usually takes between 2 – 3 days on average for your money to be ready in your chequing account.

Hope this article helped you better understand what a TFSA is, how it works and how you can take advantage of it in growing your savings and net worth.

tax free savings account winnipeg

To open a TFSA account and start accumulating funds tax-free, please click the link below to book an appointment with us!

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