You are doing the right thing- socking away money from your income to save for that rainy day or investing your funds for retirement – then why are you having to claim the investment interest on your taxes? Shouldn’t there be another way?
Well there is….starting in 2009 the Canadian government introduced something called the Tax Free Savings Account. Hooray! Finally!
Before you put all your money in to this there are some important things to know.
Ok so what is a TFSA?
A Tax-Free Savings Account (TFSA) is a way for individuals, who are 18 years of age and older, to set money aside tax-free throughout their lifetime. There are many ways in which you can invest your TFSA, such as: a savings account, mutual funds, bonds, term deposits and stocks. Working with your financial advisor will help you determine the best strategy for your unique investment goals.
How does this tax-free thing work?
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed, as well as any income earned in the account, (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
Can I only use it for retirement savings?
No. Unlike an RRSP or RESP, a TFSA can help individuals save for any purpose. There are no restrictions on the way the funds in the account are used and no time constraints for using the funds.
There are many expensive purchases people may make during their lifetime. Individuals can use a TFSA to save tax-free for a car, a home, to start a small business, or even take a vacation.
Who can benefit from a TFSA?
While short answer is most people but here are a few details on specific groups.
TFSA Benefits for seniors
Unlike RRSPs and RRIFs you can keep contributing new money into TFSAs after age 71. Since tax is the single biggest expense in retirement, the chief objective in your 60s and beyond should be to move as much money as possible from RRSPs, RRIFs and non-registered investments in to your TFSA (ensuring you remain within contribution limits).
Benefits for low-income earners
It might be preferable for a low-income earner to make a contribution to a TFSA vs an RRSP if choosing between the two. A low-income earner does not benefit as much from the tax deduction of an RRSP contribution. In addition, withdrawals from an RRSP get added to your annual income and could impact your qualification for low-income government support whereas withdrawals from a TFSA do not impact the National Child Benefit,
Guaranteed Income Supplement (GIST) or OAS benefits as they are not taxed or reported as income.
How much can I contribute?
The maximum annual TFSA contribution limit for 2020 is at $6,000.
You can also carry forward any unused contribution room from previous years to a total lifetime contribution of $69,500 currently (up to and including Dec. 31, 2020). To see your contribution room available, visit the Canada Revenue Agency website -My Account.
Can I withdraw from my TFSA?
While you can withdraw funds from a TFSA any time you want, you must wait until January of the following year before you can contribute back in to the plan, unless you still have unused contribution room.
So that is the quick run-down on the tax-free savings program. If you have questions on how a TFSA can benefit you or would like to get started –visit us, call, or book a meeting online with an advisor.