Your Guide to TFSAs in Canada

Not many people are thrilled to file their tax forms. After all, after spending countless hours working, only a portion of that hard-earned money goes into your pocket. However, the Canadian government has made it possible to maximize your savings with a tax-free savings account — TFSA. If you are over 18 and a resident of Canada, a TFSA account will become a critical tool in your financial toolset. Keep reading to find what you have been missing and how much money you can save in the long run!

What is a tax-free savings account (TFSA)?

As with the Registered Retirement Savings Plan (RRSP), the TFSA is a registered account in which you can invest mutual funds, bonds, cash, and securities. All of these assets are not taxed. Unlike an RRSP, however, when you withdraw the funds from a TFSA, you are not taxed—and the account itself is an all-purpose account.

How does a TFSA work?

Initially, in 2009, due to inflation, the contribution limit per year to TFSA was just $5,000. Over the years, this limit kept increasing and decreasing, depending on the government in power. In 2015, the contribution limit was $10,000, only to be reduced to $6,000 in 2020. This shows that you should keep yourself updated every year to maximize your tax-free funds.

TFSA is a great way to increase your wealth because not only are your TFSA contributions tax-free, but you can also earn a tax-free income, depending on which type of assets you put into your TFSA. For instance, if you were to invest the total current-year limit of $6,000 in two separate accounts:

• Investment account generating 5% per year.
• TFSA also earns a 5% income rate.

Both accounts would end up with $6,300 at the end of the year. However, if you were to withdraw from an investment account, you would be taxed, which is not the case with a tax-deductible TFSA.

Main Benefits of Opening a TFSA

As a much younger RRSP brother, the Canadian government created TFSA to make it easier for Canadian residents to save for retirement, house/apartment, or other significant expenditure. The main improvement from the RRSP model is that TFSA investments/withdrawals are not subjected to taxation. TFSA contributions are not tax-deductible, like with RRSP.

To recap, with TFSA, you can:

• Earn passive investment income that is not taxable.
• Withdraw your earnings and savings at any time without paying taxes or penalties.
• Contribute to boost your spouse’s TFSA.
• Engage with a wide range of assets such as GICs, cash, bonds, stocks, securities, and mutual funds.
• Have peace of mind knowing that your income-tested benefits will not be touched. These include Old Age Security, Guaranteed Income Supplement, and Canada Child Tax Benefit.

With that said, it would be prudent to keep track of how many contributions you made across your TFSAs. If you over-contribute to your TFSA, meaning — exceed the current-year contribution limit — you will receive a 1% penalty per month of the amount you exceeded. Day-trading in the stock market is not something you can do with TFSA, as you would get a visit from the CRA.

How to Choose the Right TFSA

As a flexible account that can be used for any purpose and withdrawn from at any time, TFSA can provide a wide range of benefits. When choosing one, you first have to ascertain your level of risk tolerance, which is almost always based on:

• Age
• Income level
• Financial goal
• Personal wealth

Professional brokerage firms diligently align their client’s risk tolerance profile with the type of investment. To give you an idea on how to choose the right TFSA, here is how you should look at each type of investment and risks associated with them:

High risk — Investment in the volatile stock market, such as penny stocks.

Moderate risk — A more balanced and diversified investing between gains and losses.

Low risk — Investment with small returns but almost no risk, such as bonds, mutual funds, cash, and GICs.

You can choose one of many robo-advisors to set your risk level when it comes to investing with exchange traded fund (ETFs), stocks, and mutual funds. This way, you usually get the best from both worlds — low risk via diversified assets and moderate to high gains. If you are not willing to take any risk at all, GIC is the only option with its guaranteed principal.

TFSA FAQ

How much can I put in my TFSA?

This contribution limit changes almost every calendar year based on the political environment. For this year’s limit, you can put a maximum of C$6,000 across all of your TFSAs.

What is a TFSA contribution room?

The contribution room or space represents the maximum amount of money/assets you can place in your TFSA. This room is depleted during the calendar year, including withdrawals and re-contributions. If you accidentally exceed your contribution room, you will be penalized by the CRA, so it’s always better to err on the side of a slightly unused contribution room.

How much can you put in a TFSA?

The limit is $6,000 in 2021. But the amount you can save depends on your personal TFSA contribution room. Your TFSA contribution room starts building up from the year you turn 18 or when the Government of Canada first introduced TFSAs, which was in 2009. This means if you’ve never put money into a TFSA before, your contribution limit could be as much as $75,500 (in 2021). The best way to find out how much money you can contribute to your TFSA is through ‘My Account’ on the Canada Revenue Agency (CRA) website.

What’s the TFSA limit for 2021?

The annual TFSA limit for 2021 is $6,000. The federal government may change the TFSA contribution limit from year to year. Although that limit increase has varied, it’s generally increased in line with inflation.

How to Withdraw from TFSA?

All withdrawals from your TFSA are tax-free due to your contributions already having been taxed. You can withdraw from TFSA at any time, without specifying the reason. Keep in mind, though, that you will deplete your contribution room if you withdraw and then refill your TFSA in the same calendar year.

Can you have more than one TFSA?

Yes, but your contribution room is counted across all of them.

Do you Have to Claim TFSA on Income Tax Return?

Yes. TFSA contributions are not tax-deductible like RRSP contributions.

Your Guide to TFSA Savings Accounts in Canada

Not many people are thrilled to file their tax forms. After all, after spending countless hours working, only a portion of that hard-earned money goes into your pocket. However, the Canadian government has made it possible to maximize your savings with a tax-free savings account — TFSA. If you are over 18 and a resident of Canada, a TFSA account will become a critical tool in your financial toolset. Keep reading to find what you have been missing and how much money you can save in the long run!

What is a tax-free savings account (TFSA)?

Founded 52 years after RRSP (Registered Retirement Savings Plan), TFSA stands for a Tax-Free Savings Account. As with RRSP, TFSA is an account in which you can contribute with mutual funds, bonds, cash, and securities. All of these assets are not taxed. Unlike RRSP, when you withdraw the funds from a TFSA, you are also not taxed, and the account itself is an all-purpose account.

However, there is a limit to the contribution you can make to your TFSA. For the year 2020, this limit stands at $6,000.

How does a TFSA work?

Initially, in 2009, due to inflation, the contribution limit per year to TFSA was just $5,000. Over the years, this limit kept increasing and decreasing, depending on the government in power. In 2015, the contribution limit was $10,000, only to be reduced to $6,000 in 2020. This shows that you should keep yourself updated every year to maximize your tax-free funds.

TFSA is a great way to increase your wealth because not only are your TFSA contributions tax-free, but you can also earn a tax-free income, depending on which type of assets you put into your TFSA. For instance, if you were to invest the total current-year limit of $6,000 in two separate accounts:

• Investment account generating 5% per year.
• TFSA also earns a 5% income rate.

Both accounts would end up with $6,300 at the end of the year. However, if you were to withdraw from an investment account, you would be taxed, which is not the case with a tax-deductible TFSA.

Main Benefits of Opening a TFSA

As a much younger RRSP brother, the Canadian government created TFSA to make it easier for Canadian residents to save for retirement, house/apartment, or other significant expenditure. The main improvement from the RRSP model is that TFSA investments/withdrawals are not subjected to taxation. TFSA contributions are not tax-deductible, like with RRSP.

To recap, with TFSA, you can:

• Earn passive investment income that is not taxable.
• Withdraw your earnings and savings at any time without paying taxes or penalties.
• Contribute to boost your spouse’s TFSA.
• Engage with a wide range of assets such as GICs, cash, bonds, stocks, securities, and mutual funds.
• Have peace of mind knowing that your income-tested benefits will not be touched. These include Old Age Security, Guaranteed Income Supplement, and Canada Child Tax Benefit.

With that said, it would be prudent to keep track of how many contributions you made across your TFSAs. If you over-contribute to your TFSA, meaning — exceed the current-year contribution limit — you will receive a 1% penalty per month of the amount you exceeded. Day-trading in the stock market is not something you can do with TFSA, as you would get a visit from the CRA.

How to Choose the Right TFSA

As a flexible account that can be used for any purpose and withdrawn from at any time, TFSA can provide a wide range of benefits. When choosing one, you first have to ascertain your level of risk tolerance, which is almost always based on:

• Age
• Income level
• Financial goal
• Personal wealth

Professional brokerage firms diligently align their client’s risk tolerance profile with the type of investment. To give you an idea on how to choose the right TFSA, here is how you should look at each type of investment and risks associated with them:

High risk — Investment in the volatile stock market, such as penny stocks.

Moderate risk — A more balanced and diversified investing between gains and losses.

Low risk — Investment with small returns but almost no risk, such as bonds, mutual funds, cash, and GICs.

You can choose one of many robo-advisors to set your risk level when it comes to investing with exchange traded fund (ETFs), stocks, and mutual funds. This way, you usually get the best from both worlds — low risk via diversified assets and moderate to high gains. If you are not willing to take any risk at all, GIC is the only option with its guaranteed principal.

TFSA FAQ

How much can I put in my TFSA?

This contribution limit changes almost every calendar year based on the political environment. For this year’s limit, you can put a maximum of C$6,000 across all of your TFSAs.

What is a TFSA Contribution Room?

The contribution room or space represents the maximum amount of money/assets you can place in your TFSA. This room is depleted during the calendar year, including withdrawals and re-contributions. If you accidentally exceed your contribution room, you will be penalized by the CRA, so it’s always better to err on the side of a slightly unused contribution room.

How to Withdraw from TFSA?

All withdrawals from your TFSA are tax-free due to your contributions already having been taxed. You can withdraw from TFSA at any time, without specifying the reason. Keep in mind, though, that you will deplete your contribution room if you withdraw and then refill your TFSA in the same calendar year.

Can you have more than one TFSA?

Yes, but your contribution room is counted across all of them.

Do you Have to Claim TFSA on Income Tax Return?

Yes. TFSA contributions are not tax-deductible like RRSP contributions.