Tax Free Savings Account (TFSA)
TFSA is a registered account that was introduced in 2009 with an aim to help Canadian residents save their money and grow it tax-free. A TFSA account can hold cash as well as stocks, bonds, mutual funds, and segregated funds, etc. while your contribution and investments remain tax-sheltered. Interest, dividends, and capital gains earned in a TFSA are tax-free for life. Your savings and investments inside a TFSA can be withdrawn at any time, for any reason, and all withdrawals are tax-free and can be spent for any purpose you want as follows:
- To fund your kids' education
- On your child's wedding
- For buying a home
- To fund the healthcare cost
- For an emergency
- To fund your retirement
Some Interesting TFSA Facts to Know
- TFSAs are a perfect tool for families to save and grow their money tax-free. Since 2009, each year, the government has set a limit on how much you can contribute to your TFSA every year, regardless of income. The contribution limit is $6,000 for 2022
- If you didn't contribute to your TFSA in a given year, you can catch up in the future and can carry forward your unused TFSA contribution room indefinitely to future years
- Withdrawals are not considered as taxable income because the contributions you made are from your “after-tax" dollars and you will not have to pay tax when you take money out of your TFSA
- If you make withdrawals from your TFSA, your contribution room is restored in the following year, so you can re-contribute the amount you withdrew in a future year with no penalties. You can re-contribute your TFSA withdrawals, but not until the next year
- Just make sure you plan it properly and don’t go over your yearly contribution limit. If you contributed more than the total allowed limit, the over-contribution amount will be subject to a tax penalty. You can check your TFSA contribution limits on your tax statement or by going to the CRA website and log in to My Account
- You can use it as an emergency fund as you can access the money at any time, for any purpose, whenever you need it
- You can have more than one TFSA, without creating an over-contribution; because you will have to pay a penalty for over-contribution
- You can never lose your TFSA contribution room. If you are just starting a TFSA and have never contributed before, you can also contribute for past years. Your total cumulative contribution limit available in 2022 is $81,500.That means you could contribute up to $81,500 today as shown in the chart
TFSA Contribution Limit by Year
| Year | Contribution limit |
|---|---|
| 2009 | $5,000 |
| 2010 | $5,000 |
| 2011 | $5,000 |
| 2012 | $5,000 |
| 2013 | $5,500 |
| 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 | $5,500 |
| 2017 | $5,500 |
| 2018 | $5,500 |
| 2019 | $6,000 |
| 2020 | $6,000 |
| 2021 | $6,000 |
| 2022 | $6,000 |
| Total | $81,500 |
TFSA is a smart way to save your money and see your savings grow tax-free. It can be an amazing tool if planned correctly. TFSA is a perfect choice for you if:
- You want to save money for an emergency fund
- You want to get more returns for your savings
- You want to grow your savings without paying taxes on the investment income
- You need quick access to your investments whenever you need them
- You are working but don't earn enough to qualify for RRSP tax benefits
- You want to save your money for medium and long-term projects
- You want to save for a specific financial goal like buying a house or for a wedding
- You have no more room left in your RRSP contribution account
- You want to save in a tax-efficient way for retirement beyond the RRSP contribution limit
How Does a TFSA Work?
- 1. Canadian residents, aged 18 and older with a valid Social Insurance Number can open a TFSA.
- 2. A TFSA can hold cash as well as stocks, bonds, mutual funds, and segregated funds, etc.
- 3. Your contribution and investments inside a TFSA are tax-sheltered.
- 4. Interest, dividends, and capital gains earned in a TFSA are tax-free for life.
- 5. Your savings and investments inside a TFSA can be withdrawn tax-free at any time and for any reason.
- 6. A monthly contribution option is available as long as you stay within the yearly limits.
- 7. If you skip a year, unused contribution room can be carried forward indefinitely to future years.
- 8. You can withdraw your money tax-free any time whenever you want for any emergencies or to fulfill some pre-planned goals.
- 9. If you make withdrawals, you can re-contribute without penalties in the following year as your contribution room is restored.
- 10. You can name a beneficiary on almost all TFSA accounts, to avoid the cost and delays related to probate and estate settlement.
- 11. Neither income earned nor withdrawals will affect your eligibility for government benefits.
- 12. In case of death, TFSA assets can be transferred hassle-free directly to your spouse without affecting their contribution room.
Benefits of TFSA’S
- 1. Tax-Free Income: Your savings as well as earnings from qualified investments are tax-free.
- 2. Faster Growth: Taxes don’t eat up the interest you earn and every dollar grows tax-free inside your TFSA which results in a faster growth of your hard earned money.
- 3. No Minimum Balance Required: There is no minimum balance required to start saving in a TFSA and you can start with as little as $1.
- 4. Various Investment Options: There are many flexible investment options available. A TFSA account can hold cash as well as stocks, bonds, mutual funds, GICs, and segregated funds, etc.
- 5. Tax-Free Withdrawals: You can withdraw your savings from TFSA without paying any interest as your savings as well as growth is tax-free.
- 6. Re-contribute the Withdrawn Amount: If you withdraw the amount, you can always re-contribute in the following year or years after.
- 7. Unused Contribution Room Never Expires: If you skip a year, or if you didn’t max out your TFSA room in a year, unused contribution room can be carried forward indefinitely to future years.
- 8. Contribution Room not linked to Income: Your TFSA contribution room is not determined by your income. If you are working but don’t earn enough to qualify for RRSP tax benefits, TFSA is a good choice.
- 9. Higher Interest Rate: TFSAs offer higher interest rates which results in more savings and more earnings ultimately.
- 10. Safe & Secure: Cash and GICs held in TFSAs are insurable up to $100,000 under the Canada Deposit Insurance Corporation Act.
Do You Need A TFSA Or An RRSP?
If you are looking to save in a tax-efficient manner then a TFSA and RRSP both can help you save money for the future. However, they do it in different ways, so depending on your circumstances, both can help you achieve your goals. Each plan has its own distinctive features and you can compare the pros and cons to make an informed decision.
| TFSA | RRSP | |
|---|---|---|
| Requirements | You should be 18 years or older, a Canadian resident, with a valid Social Insurance Number. | You need an earned income and should have filed your previous year’s income taxes. |
| Primary Purpose | You can do both short-term as well as long-term retirement savings. | Main purpose of RRSPs is for retirement savings. |
| Contribution Room | The contribution limit for 2022 is $6,000 regardless of income plus, the available TFSA contribution room carried forward from the previous years. | The RRSP Contribution limit for 2022 is 18% of earned income to a maximum of $29,210, plus unused RRSP deduction room, less any pension adjustments. |
| Contributions Length | You can contribute for your whole. | You can contribute until Dec. 31 of the year you turn 71. |
| Contributions are made with after tax dollars. | Contributions are made with pre-tax dollars. | |
| Contributions for Tax Purposes | Contributions are not tax-deductible. | Contributions are tax-deductible. |
| Contribution Deadline | Deadlines are not applicable to TFSAs as contributions are not tax-deductible. | March 1, or March 2 of a year is usually the deadline to claim the previous year’s deduction. |
| Withdrawal Rules | You can make withdrawals at any time without any tax consequences. | Withdrawals are allowed but will be taxed as income |
| Withdrawals will increase contribution room | Withdrawals will not increase contribution room. | |
| Withdrawals are not included in taxable income and hence don’t affect any government benefits. | Withdrawals are included in taxable income and hence will affect your eligibility for government benefits. | |
| Unused Contribution Room | Unused contribution room can be carried forward. | Unused contribution room can be carried forward. |
| Unused TFSA contribution room never expires. | Unused RRSP contribution room is permanently lost. | |
| Up-front Tax Advantage | There is no up-front tax advantage in a TFSA. | It lowers your taxable income for the current year. |
| Future Tax Advantages | You will not pay tax on any income earned or the money you withdraw. | Any income earned in your RRSP is tax-free as long as it stays in the plan. |
| Spousal Plan | There are no spousal TFSAs. | You can contribute directly to a spousal RRSP. |
| Creditors Protection | Not protected from Creditors and can be seized to cover personal liabilities. | Protected from Creditors and can’t be seized to cover personal liabilities. |
| Age Limit for Plan Maturity | There is no age limit for a TFSA. | An RRSP matures at the end of the calendar year in which you turn 71. |
Do you have an existing TFSA? If not consider opening an account for your savings goals today. TFSAs are great financial vehicles for Canadians to invest in because not only can you earn money in a tax-free manner, but you can earn a solid return if you invest wisely. At Family Care Insurance we can show you how a TFSA can fit into your financial plan and can help you choose the right investments to make the most of the benefits offered by this powerful saving vehicle. We will review your current financial situation to make an informed decision in order to build a plan that will meet your needs and goals and can help you maximize your savings. Make well informed decisions with helpful and honest advice. Talk to us about how a TFSA can help you grow your money.