TFSA stands for Tax-Free Savings Account. It is a savings account that helps you in earning tax-free money. It is like a basket containing tax-free gains, interests, qualified investments, funds, bonds, cash, and securities as well. With the help of a TFSA, you reach your saving goals much sooner than you think.
What is TFSA you may ask? We must know how TFSA began. These tax-advantaged accounts started back in 2009 by the Canadian Government. They were to motivate the Canadian generation to save money. These are available to individuals of age 18 or older in Canada. The TFSA requires an annual contribution. The limit in 2021 is C$6000.
Types of a TFSA:
A TFSA has three basic types:
- An arrangement in trust
- A deposit
- An annuity contract
TFSA are issued by credit unions, trust companies, banks, and insurance companies.
How to open a TFSA?
An account holder can have multiple TFSAs at any time. The only limitation is that the total contribution amount is not more than the available contribution room for that year. To create a TFSA,
- Contact the financial institution, insurance company, or credit union.
- To register the qualifying arrangement as a TFSA, provide your SIN and date of birth to the issuer. Supporting documents might also be necessary to open the TFSA.
About the contribution room of a TFSA:
The contribution room is the total amount of the following:
- The unused contribution room of a TFSA from previous years.
- The current year dollar limit of a TFSA
- The previous year’s withdrawal made from the account
The dollar limit of a TFSA is not divided in the year when the individual turn 18, or the individual dies or becomes a resident or non-resident of Canada.
Understanding how a TFSA works!
With the help of a TFSA, you carry investments of all kinds, such as bonds, funds, cash, and stocks. You also withdraw the capital gains, interests, contributions, and dividends that accumulate in the account whenever you want. This withdrawal doesn’t require any taxes.
There is a contribution limit specified for each account holder. This is a yearly total amount of contribution required by a holder of the account and is determined by the Government of Canada. If at the beginning of the year, the resident of Canada is 18 years or older, the room of contribution starts to accumulate yearly. If the person doesn’t pay their due contribution in a given year, the amount adds to the contribution for the upcoming years.
In 2009, the contribution limit set to C$5000 per year. Later, from 2013 until 2018, the limit set to C$5,500 yearly. However only in 2015, the contribution limit changed to C$10,000. From 2019 until today, the yearly contribution limit increased to C$6000.
Advantages of a TFSA:
In a TFSA, holding investments has many advantages because the income from the investment doesn’t require any tax payment. Another advantage is that you can withdraw your money at any time, for any reason, and without paying any tax. The amount you withdraw can also be put back in TFSA. It just needs to be done in the following year so that the contribution room is not affected.
A TFSA is flexible enough to let you save for long-term and short-term goals. It helps you achieve your savings goals and lets you use the money whenever you need it.
You do not need to pay tax on the income from the investment. Additionally, the savings grow faster when the return potential of the investments is high.
Options for TFSA investments:
A number of qualified investments can be used within a TFSA. These investment types include: mutual funds, cash, bonds, listed securities on the stock exchange, some shares of corporations of small businesses, and guaranteed investment certificates (GIC). Each of these investment types is different in both its benefits and disadvantages. If you need help in finding the best investment type, consult a TD financial advisor. They help you in choosing the best option(s) while keeping in mind the potential risks you possibly take. They also guide you with more detailed options eligible for a TFSA.
Savings through a TFSA and how it helps:
If you earn anything in your account, be it income or any kind of growth from your investment, you will not be taxed as long as it is in the TFSA. This means that the savings grows even more. You easily calculate the savings using the TFSA calculator.
A TFSA is an ideal tax-advantaged savings account that helps in saving for multiple uses in a single registered account. The savings increase with time, helping you in achieving your savings goals.
TFSAs also benefit non-registered investments. They help you in converting taxable amounts into tax-free amounts for the rest of your life by maximizing your investment growth and making an efficient investment profile.
It is also an ideal tool to deposit pension income.
TFSA and RRSP:
Both RRSPs and TFSAs provide tax-advantaged saving accounts, helping you get to your savings and investment goal(s). But still, both are different in advantages and disadvantages as well.
A RRSP is the registered retirement savings plan. It is designed to provide income to you after your retirement. The contribution limit per year depends on the income of the prior year with some adjustments. It also has an annual maximum limit. The notice of assessment from the prior year contains information about the contribution limit. The contributions do not include taxes and the withdrawal of the money holds tax.
A TFSA on the other hand does not depend on retirement. Rather, it helps you save money for a number of different reasons and goals. It is different from RRSP because the contributions you make to your TFSA account do not depend on your income. Also, the tax is not applicable on the withdrawal of the amount. Another flexibility is that you can withdraw an amount at any time and you do not pay any kind of tax on it. The amount withdrawn can also be contributed again in the following or the subsequent years. This re-contribution does not affect the contribution room in those years.
What happens to a TFSA if the account holder dies?
If the holder appoints their spouse or some other common-law partner as their successor holder in their lifetime, then those successors execute the plan without the TFSA being affected. You can also appoint a beneficiary or multiple of them to receive the funds when you die. This facility of successor or beneficiary is not available in Quebec but is available in all other territories and areas. People from Quebec can make their designations by writing a will. However, a word with a legal advisor is necessary before making any decision about taxes or an estate.
Is it possible for a non-Canadian to open a TFSA and what if someone becomes a non-resident while having a TFSA?
No, only residents of Canada can open a tax-free savings account. If a person becomes a non-resident while holding a TFSA, he/she can still withdraw the amount from the account tax-free. However, one is no longer allowed to make contributions. Additionally, the contribution room will not accumulate while said person is a non-resident.
How to make online contributions to TFSA?
In the case of Scotia investments, follow the steps below for online contributions.
- Sign-in to the account of Scotia OnLine.
- Click on the investing tab.
- Click on the Scotia Investments tab.
- From the left navigation side, click on “Contribute to Existing Investment”.
- Select your TFSA and select your desired contribution type.
Can borrowed funds be used for contributions to TFSA?
Borrowed funds for contributions to TFSA are allowed. However, the expenses of interests that come with borrowed loans or money are not tax-deductible.
What happens in case of over-contribution to TFSA?
A tax of about 1 percent is imposed by CRA, the Canada Revenue Agency, for a partial or complete month until the over-contribution stays in the account. The tax is applied until either the over-contribution amount is withdrawn from the account, or the complete over-contributed amount is consumed by the unused TFSA room in the following years. This is for eligible individuals only.
