In my last post, I discussed RRSPs. This time, I want to introduce you to the Tax-Free Savings Account (TFSA) since many people I speak to aren’t taking advantage of this product.
Why aren’t people using a TFSA, you ask? Well, from feedback I’ve gotten, it’s simply because many of us don’t know how it works.
Let’s fix that! Read on…
WHAT IS A TFSA?
A TFSA (Tax Free Savings Account), like the name suggests, is a program we can use to save and invest money, all tax-free. We can use a TFSA for any type of savings goal.
It was introduced in 2009 as a registered plan so all contributions and growth are monitored by the federal government based on our Social Insurance Number.
Note that the TFSA itself is not an investment, it’s simply a “container” that holds investments and these investments must adhere to the rules of the program.
HOW DOES IT WORK?
The idea behind the TFSA is that we invest our money in a tax-free environment, so our money can compound faster while it’s in the plan.
If you’re wondering why tax-free growth is such a big deal, take a look at the example on the right.
- How can I open a TFSA?
To be eligible for an TFSA, you must be a Canadian resident for tax purposes, be over 18 and must have contribution room.
- How much can I put into my TFSA?
Here are the contribution limits for each year since 2009:
|Year(s)||Annual limit||Cumulative total|
|2009, 2010, 2011, 2012||$5,000||$20,000|
|2016, 2017, 2018||$5,500||$57,500|
Unused contribution room from previous years are carried forward, so as an example, someone who was eligible for a TFSA in 2009 but never had one, can contribute up to $57,500 in 2018.
Withdrawals also affect your contribution room for that calendar year – you may have to wait until the following year for your contribution room to increase.
- What can I invest in?
Similar to investing in an RRSP, GICs (Guaranteed Investment Certificates) and Mutual Funds are used by many Canadians. Stocks and real estate can also be used.
It’s important to note that your investments should be based on your personal risk tolerance and investment objectives and speaking to an advisor is a great way to make sure you are using a strategy that works for you.
- How long can I contribute for?
There are no age limits for contributing to a TFSA, so you can continue as long as the program is available, and you are eligible.
WHO IS IT RIGHT FOR?
A TFSA is a great way to save money for short term goals (vacations, cars, emergency fund etc.), but it’s becoming a more popular way to save for retirement because of the tax-free benefits.
As business owners, one advantage of using a TFSA is that the contribution room isn’t based on earned income like an RRSP. We usually declare less income when filing taxes, so our calculated RRSP room can be restrictive. A TFSA would be a good option for increasing retirement savings.
Also, since many business owners are in a higher tax bracket during retirement, using a TFSA as the first option for retirement savings may be more tax-effective than an RRSP when it comes to withdrawing the money.
Another thing to keep in mind (especially if you are thinking of running your business abroad) is that the growth on your money in a TFSA is tax free while you are a resident of Canada, so if you move outside of the country, you may have to pay applicable taxes.
Depending on your goals, a TFSA may make more sense for you, or using both a TFSA and RRSP may be best. It’s about knowing the pros and cons of each and making sure your money works for you!
To learn more about TFSAs: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html
Kim Lowrie is an insurance agent and mutual fund representative with World Financial Group.
She and her husband have made it their lifelong mission to help families, individuals and business owners succeed financially.
To find a solution that best fits your needs and goals, connect with Kim: