In 2009 the Canadian Federal Government introduced a new investment plan called the Tax-Free Savings Account (TFSA). Once invested in the Tax Free Savings Account, funds grow “tax free” and are never subject to any income tax, including upon withdrawal.
Whatever your reason for saving, the TFSA can help you achieve your objectives. You can use a TFSA to help meet short-term goals, such as buying a new car or a vacation. Or, you can use it to help you reach your long-term investment goals faster, for example, supplementing your Registered Retirement Savings Plan (RRSP).
Here are a few key points to remember about TFSAs:
- Since 2009, everyone who was at least 18 years old began to accumulate $5,000 of TFSA contribution room. This amount is cumulative and will be carried forward indefinitely
- Unlike the RRSP system, any amount withdrawn from your TFSA in a particular year will be automatically added to your TFSA contribution room for the following year, allowing you to withdraw TFSA funds to re-contribute an equivalent amount in a future year. As with RRSPs, any excess contributions beyond your limit will be taxed at 1% per month
- Any Canadian resident who is at least 18 years old is allowed to open a TFSA (the only requirement is that you have a Social Insurance Number when the account is opened)
- Contributions to a TFSA are not tax-deductible; however, the income generated will not be taxed
- The TFSA provides seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach the age of 71. Canadians are able to contribute to their RRSP until December 31st of the year in which they turn 71; however, at that time, unless they are investing within a TFSA, new investments will not be tax sheltered. Note: Investment earnings within a TFSA do not affect Old Age Security benefits
