Sometimes considered to be the hotter, younger sibling to the RRSP (Registered Retirement Savings Plan), the TFSA (Tax-Free Saving Account) has become very popular as a smart savings and investment tool.
That isn’t surprising for a few reasons:
Any Canadian who is the age of majority can contribute the maximum amount each year. In 2016, the maximum contribution is $5,500. You can also carry forward any unused contribution room from previous years. So if you have never contributed to a TFSA, you can contribute a total of $46,500 in 2016.*
You can withdraw money from your TFSA account anytime tax-free, unlike an RRSP where you are taxed on the money you withdraw.
You can use your TFSA funds to invest in GICs, stocks, bonds or mutual funds. As your investments grow, you don’t have to pay any taxes on earned interest, dividends or capital gains.
You can keep contributing to your TFSA at any age, even after 71, which is the age you can no longer contribute to your RRSP.
But TFSAs can be a bit tricky too. It’s important to understand the facts about TFSAs to make them work for you. Avoid making these mistakes:
Don’t contribute more than the limit*. If you do, the CRA (Canada Revenue Agency) will make you pay a tax of 1 percent per month on every dollar you have contributed over the ceiling.
If you withdraw money, don’t put it back in the same calendar year. You must wait until the next calendar year or you will be penalized by the CRA.
Don’t just take your TFSA money out and move it to another institution. While this is allowed, if you don’t follow proper procedures, this action could be considered an over-contribution, which would have tax implications. Ask about the right course of action to take. (It’s the same paperwork required to move RRSPs from one institution to another.)
Don’t think of your TFSA as just another savings account. Put your money to work. Your TFSA can shelter a variety of investments such as GICs, stocks, bonds and mutual funds. When you combine the growth potential of these investments with the tax-free feature of the TFSA, only then are you maximizing the true value of your TFSA.
When you understand the ins and outs of TFSAs, you will realize great rewards in the future! Talk to your Western Financial Group broker about putting the TFSA to work for you today!
* The amount you can contribute varies from year to year. From 2009 to 2012, the TFSA contribution was $5,000 per year. From 2013 to 2014, it was $5,500 per year. In 2015, it was $10,000. In 2016, it was reduced to $5,500. By 2016, the total contribution limit is $46,500.