No one knows who named it a savings account, but whoever did should probably give up the naming part of their job! TFSA’s are much more helpful as investment accounts. If you invest now, you’ll get higher returns in the long run, and you won’t have to pay a single dollar in taxes.
Perhaps this discussion of TFSAs has just gotten you interested in finding out more about them. You don’t need to worry if that is the case. Let’s take a quick look at everything TFSA. Call Pankaj Bhatia from Insure In Canada to discuss your Savings goal.
To encourage people to save money, the Canadian government introduced TFSA’s in 2009. In contrast to your childhood savings account, a TFSA is much more sophisticated. Those stale lollipops from your local bank branch earned almost no interest but provided access to all you could eat. Consider TFSAs as baskets instead. The basket can be filled with various financial instruments – ETFs, GICs, stocks, bonds, and cash investments. Taxes have already been paid on the portion of your income you put into your TFSA, so you won’t have to pay any when you withdraw it.
What is a TFSA, and how does it work?
Depositing money into a TFSA and watching it grow is the goal of a TFSA. With a TFSA, you can withdraw your money any time, which is one of its most significant advantages. There are no restrictions on withdrawals like in RRSPs, but you’re limited to how much you can contribute each year. TFSA contribution limits vary yearly, allowing you to put a maximum amount into the account. You’ll be penalized 1% monthly until you withdraw your excess contribution if you over-contribute. Before opening a TFSA and contributing, you should consider this year and past limits.
At the start of the following calendar year, the amount you withdraw from a TFSA is added to your contribution limit. You will need to wait until January 1 of next year to add $5,000 back to your TFSA if you have already reached your contribution limit. Failure to contribute to a TFSA does not result in losing that contribution room. Your contribution limit will expand every year as it rolls over.
The advantages of a TFSA
Tax-favoured savings accounts, or TFSAs, are often referred to as “tax-advantaged accounts” by the government. People use TFSAs to save for retirement or other large purchases, such as a house, as they are tax-exempt. A TFSA does not offer immediate tax breaks like an RRSP. However, all investment gains are tax-free in the future. Taking money out of your TFSA will not require you to pay any taxes since you already paid taxes on the money you put into it.
A TFSA has certain limitations.
If you aren’t careful, TFSAs can get you in a lot of trouble. You can open as many TFSAs as you want, so it’s easy to lose track of how much you’re contributing. If you over-contribute (i.e., put in more money than you’re allowed by law in a calendar year), you will be charged a penalty of 1% per month on the excess amount you put into your TFSA, even if it’s an accident.
You cannot day-trade stocks in your TFSA unless you want to experience the wrath of the Canadian government’s tax department.
Limits on TFSA contributions
The government does not plan too far ahead when setting TFSA limits.
Contributions to TFSAs are limited to $6,000 in 2022. A total of $81,500 can be deposited into a TFSA if you’ve never contributed to one. The unused TFSA contribution room rolls over to the following year.
The year you turn 18 or become a Canadian citizen is the year you start building TFSA contributions. You cannot contribute more than $6,000 to your TFSA this year, regardless of your income or citizenship status (assuming you are over 18). For 2022, the lifetime contribution limit is $81,500 since you can start accumulating contribution space in 2009. The CRA will update their contribution limits page as soon as they set a new limit.
You can reach your maximum contribution by subtracting the amount you have deposited over the years from your total lifetime limit. You can re-contribute your TFSA withdrawals the year after you made them if you have withdrawn from your TFSA.