TFSA basics: Contributions and withdrawals
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.
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
- From 2016 to 2018, the limit went back to $5500 per year
- From 2019 to 2021, the limit increased to $6000 per year
- The total cumulative limit is $75,500 (assuming you were age of 18 or older in 2009)
|Year||Annual Limit||Cumulative Limit|
- Unlike RRSPs, contributions are not tax-deductible
- Unlike the RRSP, you can continue to contribute to a TFSA even after the age of 71. There is no upper limit on when you can contribute to TFSA
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Any withdrawals from a TFSA can be added back but you should wait till the following calendar year to avoid penalties
- Just like with the RRSP, unused TFSA contribution room is carried forward and accumulates in future years.
More important details about Tax Free Savings Accounts
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
Putting more than that will attract penalties. If you have not utilized your past contribution room, it carries forward. For example, in 2021, everyone (assuming you were 18 or over in 2009), can contribute up to $75,500:
If you make withdrawals from the TFSA, the full amount of withdrawals can be put back into the TFSA in future years but you should wait till the following calendar year for that amount to be added back to your contribution room. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
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
What HAPPENS to your TFSA when you die
With a TFSA, you can name any beneficiary to receive the money when you pass away. If you have a spouse, the spouse can be a successor annuitant which allows the surviving spouse to not only receive the money tax free but also maintain the TFSA in a TAX Free environment. For more information:
Related article: TFSA Beneficiary rules
The TFSA has 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?