What is a TFSA (Tax-Free Savings Account)?
A Tax-Free Savings Account (TFSA) is a registered tax-advantaged savings account that can help you earn money, tax-free. You can think of a TFSA like a basket, where you can hold qualified investments, that may generate interest, capital gains, and dividends, tax-free. To get you started, we break down: what is a TFSA, how it works, and how it can benefit our savings plan.
When did Tax-Free-Savings Accounts become available?
The TFSA was introduced in 2009 by the Government of Canada as an incentive for eligible Canadians to save.
How does a TFSA work?
You can hold qualified investments like cash, stocks, bonds, mutual funds in a TFSA and can withdraw the interest, capital gains, and dividends earned in the account at any time1, without paying taxes (or reporting the withdrawals as income when you file your taxes). Each year, the Government of Canada determines the maximum amount a holder of a TFSA can contribute to it. This limit is known as the contribution room. The contribution room begins to accumulate every year, if any time in the calendar year, a Canadian resident is 18 years and older. If you don’t contribute the maximum amount set for a given year, this amount is carried forward and is added on to your contribution room for future years.
Who is eligible for a TFSA?
TFSAs are available to every Canadian resident, who has attained the legal age of majority in their province with a valid Social Insurance Number (SIN).
What are the benefits of opening a TFSA?
There are many benefits of using a TFSA to save: Added flexibility. A TFSA is a savings solution that offers you the flexibility to save for a multitude of short-term and long-term goals. It can help you reach your saving goals, and you can withdraw your money when you need it. Tax-free growth. You pay no tax on any investment income you may earn in your TFSA and you can hold a variety of qualified investments, including cash, stocks, guaranteed investment certificates and mutual funds. The higher the return potential on your investments, the faster your savings may grow, tax-free. Retirement planning. A TFSA can complement your personal RRSP by providing additional tax-advantaged savings when you have no more RRSP contribution room or you are over age 71 and not allowed to hold an RRSP anymore. By contributing to a TFSA, your contributions as well as any income earned in the account are tax-free, even when withdrawn.
You can withdraw funds from the TFSA without paying tax. This makes the TFSA a great tool to save for big-ticket items. When you’re ready to use your funds, you can withdraw without paying tax. This gives you more money for the things you care about.
What are my TFSA investment options?
You can hold a variety of qualified investments in your TFSA – with common investment
types being:
Cash
Mutual funds
GICs
Stocks
Bonds
How is a TFSA different from an RRSP?
A TFSA is not designed specifically for retirement and can help you save money for a wide range of goals. The amount you can contribute is not based on your income and your contributions are not tax-deductible. You can withdraw your money any time you want it. You don’t pay tax on those withdrawals. You also don’t lose contribution room when you make a withdrawal – you can recontribute that amount to your TFSA the following year or subsequent years.