A TFSA is an investment account registered with the Canada Revenue Agency. It offers tax advantages to save for a variety of purposes. The TFSA was created as part of the 2008 federal budget under Prime Minister Stephen Harper. It was designed to encourage Canadians to save money for their future by giving them a tax break on any income or growth earned on their savings. It is exactly as advertised, you do not pay tax on anything held within this type of account.
How Does the TFSA Work?
Every Canadian resident is eligible to open a TFSA in the year they turn 18. Every year from that point forward Canadian residents accumulate contribution room. Annual contribution room is earned each year and accumulates. It is indexed to inflation and is rounded to the nearest $500. Contribution room can also be changed through the Federal budget like it was in 2015 and again in 2016. The expected contribution room increase in 2023 is $6,500 which would bring the maximum contribution room to $87,500 for people who were 18 years of age in 2009. For a history of the TFSA contribution limits visit here.
You are able to purchase and hold a wide range of investment types in your TFSA like GICs, bonds, stocks, mutual funds, and ETFs; which grow to help fund your savings goal.
What happens when a withdrawal is made?
TFSAs are designed to be used for both short-term and long-term savings. When you make a withdrawal from a TFSA it is not subject to any tax. Unlike an RRSP, you do not lose that contribution room. However, you do not gain it back until the following calendar year. For example, if you have maxed out your TFSA contributions and make a $1,000 withdrawal you will not be able to contribute it back until January 1st of the following year.
What are some common uses of TFSAs?
Because TFSAs are so flexible and have the benefit of tax-free growth, they are suitable for a variety of savings goals. Some common uses include saving for an emergency, a large purchase, education, retirement, or a trip. Some people may use them for speculative investments since the capital gains aren’t taxed others use them as part of their estate planning strategy since you are able to name a beneficiary and the proceeds by-pass probate upon your passing.
TFSAs are a great way to save for a variety of specific goals. They are flexible and easy to use, however there are some nuances you need to be aware of. If you would like to learn more about TFSAs or would like to evaluate your TFSA strategy, please reach out to me through https://www.planningandinvesting.com/contact.
Bobby McBride holds the Certified Financial Planner (CFP) designation and is Financial Planner at Planning with Bobby Inc. He also holds the Chartered Financial Analyst (CFA) designation and is an Investment Advisor at Investing with Bobby of Designed Securities Ltd.
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