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Everything You Need to Know About TFSA in Canada

If you want to begin saving money and haven’t started yet, you should consider a Tax-Free Savings Account (TFSA). Even though it’s called a savings account, you can hold various investments such as cash, securities, mutual funds, stocks, etc.

What is a TFSA?

TFSAs got introduced by the Canadian government in 2009 to get people to start saving throughout their lifetime. Contributions, earned interest, capital gains, and dividends aren’t taxed and can get withdrawn tax-free. This is especially great as your earnings will get compounded tax-free!

You can withdraw from your TFSA earnings at any time and can use the money for anything you want. A TFSA is an excellent choice of investment for the short and long-term saver. Due to your earnings getting compounded tax-free, it gets recommended to leave your money until retirement to benefit.

TFSAs don’t have expiry dates, so you aren’t forced to make a withdrawal by a certain age.

Who Can Open a TFSA?

To qualify for a TFSA in Canada, you need to be 18 years old or older and have a legitimate social insurance number (SIN).

There are certain provinces and territories where the legal age to enter into a contract is 19 years old. This includes opening a TFSA. If this is the case, the contribution room for when the person turned 18 will get carried over to the following year.

If you’re a non-resident living in Canada and have a valid SIN, are 18 years old or older, you will be eligible to open a TFSA. Unfortunately, all contributions as a non-resident will get taxed at 1% for every month the contribution remains in the account.

The Three Types of TFSAs

There are only three types of TFSAs available:

  • A deposit
  • An arrangement in trust
  • An annuity contract

TFSAs can get issued through insurance or trust companies, banks, and credit unions.

TFSA Contributions

Your contribution room is the total deposit amount allowed into your TFSA. You’ve been accumulating a contribution room since 2009 from the age you were 18 years old and a Canadian resident, even if you didn’t have a TFSA at the time. You also don’t need to earn an income to contribute towards a TFSA.

Take note that whatever contributions you make towards your TFSA, you are doing so with after-tax income. Therefore, you won’t get a tax refund for your contributions.

The maximum contribution room varies from year to year and is currently $6,000 for the year 2021. If you deposit more than the maximum allowed for the year, it will be considered an over-contribution. You will then get charged a penalty by the Canada Revenue Agency (CRA) of 1% per month until you withdraw the excess amount.

You will have the opportunity to carry forward any unused contribution room from one year to the following year. If you decide to start contributing from 2021 for the first time, you are eligible for a total contribution lump sum of $75,000, as long as you were 18 years old in 2009 and have a valid SIN.

If you had previously made contributions toward a TFSA and didn’t continue making deposits, you can subtract the previous deposit amounts from the $75,500 to get to your maximum contribution amount.

Let’s look at an example:

If you have been 18 years old since 2009, opened a TFSA in 2012, and made contributions accumulating to a total of $15,000 before stopping, you will have the opportunity to make a lump-sum contribution of $60,500 in 2021.

You can have more than one TFSA, but you can lose track of your contribution room if you have too many. The total contribution room of all your TFSAs combined will be the same as if you only had one account. This means that all your contributions must add up to $6,000, regardless of how many accounts you have.

If you incur any losses within your TFSA, the losses won’t be considered a withdrawal, therefore not becoming a part of your contribution room.

A TFSA holder can do the following with their account:

  • Contribute towards the TFSA
  • Make withdrawals from the TFSA
  • Choose how their funds get invested

No one else can contribute to your TFSA on your behalf, and you cannot have a joint TFSA. However, your spouse or common-law partner can give you money to contribute to your account and vice versa.

Types of Investments Allowed in a TFSA

There are various types of investments allowed in a TFSA and are the same as those in a Registered Retirement Savings Plan (RRSP). The types of investments permitted are as follows:

  • Mutual funds
  • Cash
  • Bonds
  • Securities listed on a specified stock exchange
  • Specific shares of small business corporations
  • Guaranteed investment certificates

Withdrawing from a TFSA

A withdrawal doesn’t get considered if you transfer from one TFSA to another. Having a TFSA provides you with flexibility, as you can make a withdrawal from your account at any time, but this will also be dependant on the type of investment held within your TFSA.

When withdrawing funds, you won’t reduce the total contribution amount of your TFSA that’s already gotten made for the year.

If you are making any withdrawals during the year, you can contribute at the beginning of the following year to your contribution room again. The only time you can replace the withdrawal amount in the same year is if there’s still contribution room available in your TFSA.

Conclusion

Whether you’re looking to save towards buying a house or car, or if you’re planning for your golden years in retirement, a TFSA is an excellent investment choice for all your short and long-term savings goals.

Don’t leave investing for too long, as you want to benefit from compound interest on all your investments, especially if your gains are compounding tax-free!

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