In 2009, the Tax Free Savings Accounts (TFSA) was introduced and based on what I see as a financial educator, they are really gaining momentum. Despite the growing popularity, I continue to meet people who don’t fully understand them or worse yet, know nothing about them. This has motivated me to write a few articles on these amazing savings vehicles.
Let’s start with a few of the basics of the TFSA:
- You have to be a Canadian resident
- You must be age 18 or older
- Contribution limits
- From 2009 to 2012, you could contribute up to $5,000 per year to a TFSA.
- For 2013 and 2014, the annual limit was increased to $5500.
- For 2015, the limit was again increased to $10,000
- For 2016, the limit will return to $5500
- The total cumulative limit is $46,500 (assuming you were age of 18 or older in 2009)
- Unlike RRSPs, contributions are not tax-deductible
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Unused TFSA contribution room is carried forward and accumulates in future years.
- TFSA assets can generally be transferred to a spouse or common-law partner upon death tax-free.
More important details about Tax Free Savings Accounts
Contribution rules – Since the introduction of the TFSA, lots of Canadians have been hit with TFSA over-contribution penalties because of a misunderstanding of some contribution rules.
Related article: Problems with over-contributing to TFSAs
As mentioned, you could contribute $5000 per year into a TFSA from 2009 to 2012. Putting more than that will attract penalties. If you have not utilized your past contribution room, it carries forward. For example, in 2015, everyone (assuming you were 18 or over in 2009), can contribute up to $36,500:
- $5000 for 2009,
- $5000 for 2010,
- $5000 for 2011,
- $5000 for 2012,
- $5500 for 2013,
- $5500 for 2104,
- $10,000 for 2015 (new 2015 Federal Budget)
- $5500 for 2016 (new Liberal Government)
- $5500 for 2017
If you make withdrawals from the TFSA, the full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
Investing options – One common misunderstanding is how many people think the Tax Free Savings Account (TFSA) is just a savings account. After all, the ‘SA’ in TFSA stands for ‘savings account’.
With the money in the TFSA, you can choose from a wide range of investment options such as mutual funds, individual stocks, Guaranteed Investment Certificates (GICs), bonds and savings accounts. Given the wide range of options, maybe the government should have called them Tax Free Investment Accounts (TFIA) instead. Take the time to explore your TFSA investment options to determine your best investment strategy.
Related article: How to invest your TFSA
TFSAs have universal appeal – Since the TFSA is still in an infancy stage of evolution, we have yet to see the power and the opportunities for these accounts. They can be used by so many different people in different ways. They can be used as longer term investment accounts or simply for saving to spend. They have applications for retirement and estate planning. They can be used for their tax benefits. For some, they will replace RRSPs but for others, the TFSA or RRSP debate will be less definitive.
Related Article: The new debate: TFSA or RRSP
No matter who you are, you should incorporate TFSAs into your financial plan. There are very few financial vehicles that have so many benefits with very little downside to such a broad range of people. One exception is when you have significant debts, especially high interest debt.
Related article: TFSA or paying down debt? Which is better?