Financial Literacy
Investing Money Tax Free with a TFSA
Whether you’re saving for a big purchase, your first home, or an extended vacation, a Tax-Free Savings Account (TFSA) can help you get there. Once you’ve opened a TFSA, you can contribute at any time and earn interest or returns, tax-free — unlike a non-registered savings account. Here in this article, we explain to you what the TFSA is all about and how it is a wonderful investment tool for your future.
What's The Point of a TFSA?
In order to buy or sell certain investments, such as stock and bonds, you’ll need to open an investment account that are typically non-registered government savings accounts or plans. Whenever you are able to capture any realized capital gains, that means you successfully sold your investments at a higher price than what you originally paid for. In Canada, capital gains are taxable and you will need to report it when filing your taxes every year. As such, it is very important to take advantaged of registered accounts such as a Tax-free Savings Account (TFSA) which was first introduced in 2009. Unlike a non-registered savings account, a TFSA allows you to contribute money into your account and earn interest or returns, tax-free!
Is There A Contribution Limit to TFSA?
There are certain requirements that you have to follow, for you to be able to contribute to your TFSA:
- You have to be a resident of Canada.
- Your TFSA contribution room begins to accumulates the year in which you are 18 years of age.
- You will continue to accumulate contribution room within your TFSA every year in which you are above 18 years of age and a resident of Canada
- You will continue to accumulate contribution room even if you don’t file an income tax return or open a TFSA.
The TFSA contribution limit for 2021 is $6,000. The annual TFSA contribution limits per year are listed below:
- The annual TFSA dollar limit for the years 2009-2012 was $5,000.
- The annual TFSA dollar limit for the years 2013-2014 was $5,500.
- The annual TFSA dollar limit for the year 2015 was $10,000.
- The annual TFSA dollar limit for the years 2016-2018 was $5,500.
- The annual TFSA dollar limit for the year 2019 was $6,000.
- The annual TFSA dollar limit for the year 2020 is $6,000.
- The annual TFSA dollar limit for the year 2021 is $6,000.
The annual TFSA contribution limit is subject to change by the federal government. If you have never contributed to a TFSA and have been eligible since its introduction in 2009, your cumulative contribution room will be $75,500 in 2021.
How Do I find Out My Contribution Limit For The Year
Every year, the government calculates how much TFSA contribution room you have available using the following formula:
Contribution Limit = Annual contribution room for the current year + any unused TFSA contribution room from previous years + any withdrawals made from the TFSA in the previous year
Example 1. Your birthday is in December 1999. That means you turn 18 in December, 2017 and you are able to contribute a maximum of $23,000 into your TFSA for 2020, if you have never contributed to a TFSA before.
Example 2. Your birthday is in December 1999. You were very eager to open a TFSA in 2017 and have been contributing the maximum contribution room each year. In December 2020, you decided to sell some of your investments and withdraw $1,000 to buy your family Christmas presents. In 2021, your contribution limit for the year is $7000.
For more information about TFSA contribution limit, you can find on the CRA website here.
What if I can’t contribute the maximum contribution room amount?
Remember, you can carry forward any unused TFSA contribution room from previous years into future years indefinitely. For 2021, you can contribute up to $6,000 (annual contribution room for 2021) PLUS any unused contribution room from previous years into your TFSA.
What happens if I over-contribute to my TFSA?
If you contribute more than your contribution limit, you may be subject to a penalty tax of 1% per month based on the highest excess TFSA amount in that month.
For more information about TFSA contribution limit, you can find it on the CRA website here.
Can I contribute to my spouse’s TFSA?
No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RRSP. However, you can give your spouse money, which they can then contribute to their own TFSA. Any income your spouse earns on the money in their TFSA is theirs and will not be attributed back to you.
When can I withdraw money from my TFSA?
You can withdraw funds from your TFSA any time you want and you don’t have to reach a certain age before you withdraw your money. Remember, withdrawals made from your TFSA will be added back to your TSFA contribution room the following year.
How much can I withdraw from my TFSA?
There is no limit on how much you can withdraw from a TFSA.
Can TFSA withdrawals affect other income based programs?
Since TFSA withdrawals don’t count as taxable income, they don’t affect federal income-tested benefits or tax credits you may receive, including the Canada Child Benefit program, the Canada Workers Benefit, the Good and Services Tax / Harmonized Sales Tax (GST/HST) Credit, and the Age Credit. TFSA withdrawals also won’t reduce benefits based on your income levels, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits.
What can I spend the money on?
Anything you want! You can use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home. You could also wait until you retire and use it to supplement retirement income you may have from pensions, RRSPs or other sources.
What Should I do Next?
The best time to invest is yesterday, the second best time to invest is today. We advise you to speak to a professional financial planner about opening a TFSA account and how to get active in your retirement and savings plan. A little effort now goes a long way.
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