Thursday, October 30, 2014

Tax-Free Savings Account

Save Money Using a Tax-Free Savings Account

The Tax-Free Savings Account (TFSA) was implemented by the government of Canada effective January 1, 2009. The TFSA is a savings vehicle to help eligible Canadians not only save, but save tax-free.

Generally, interest earned through a savings account is taxed by the Canadian government. However, interest, dividends or capital gains earned through a TFSA are not taxed, even when it is withdrawn.

Eligible Canadians can contribute $5,000 every year starting January 1, 2009. In 2013, this TFSA limit was increased to $5,500 annually. In order to be eligible for a TFSA, an individual must be 18 years or older, be a resident of Canada and have a valid Canadian social insurance number (SIN).

In order to maximize the benefit from your TFSA, you need to understand the benefits, know how to set up a TFSA, understand contribution room, implications when making withdrawals, when taxes may be payable, and much more. This web page is dedicated to helping individual Canadians understand and leverage the power of Tax-Free Savings Accounts in 2014.

Video Overview of Tax-Free Savings Account (TFSA)

Benefits of a Tax-Free Savings Account

So why should you have a Tax-Free Savings Account? There are several benefits of having a TFSA as discussed below:

  • Tax-Free Savings: given that you don't pay taxes on the interest, dividends or capital gains generated in your TFSA, you can grow your savings at a much more accelerated pace.
  • Tax-Free Withdrawals: the TFSA provides flexibility if you need to withdraw your money if an emergency arises and the money withdrawn is not taxed.
  • Re-Contribution to TFSA: in case you had to withdraw money from your TFSA, you are allowed to re-contribute the amount beginning in the year following the withdrawal.
  • Investment Options: you have a wide range of investment vehicle options like Savings Account, High Interest Rate TFSA, GICs and Term Deposits, Mutual Funds, ETFs/Equities, etc.
  • Non-Registered Investing: if you trade or invest in the stock markets using equities and/or ETFs, you can benefit from the TFSA by not having to pay taxes on dividends and capitals gains.
  • RRSP Maxed Out: if you are one of those who has maxed out on your RRSP contributions, a TFSA is a welcome break to save extra money tax-free.

Note: Before attempting to deposit or withdraw funds in and out of your TFSA, be sure to familiarize yourself with the TFSA rules outlined in the next section.

Tax-Free Savings Account Rules

Contribution Room: Effective January 1, 2009, you are allowed to contribute $5,000 annually (indexed to inflation and rounded to the nearest $500) to your TFSA. If you have not contributed to your TFSA in previous years, you can add that amount to your contribution room.

Over-Contribution: If you have over-contributed to your TFSA, you will be liable to a on 1% tax on your highest excess TFSA amount in that month. If you make TFSA contributions while you were a non-resident of Canada, you will be charged 1% monthly tax on these contributions.

Multiple TFSA Accounts: You are allowed to have more than one TFSA account so long as the total amount contributed does not exceed your allowable contribution room. If you transfer money from one TFSA to another, ensure it is a direct transfer, if not, you will be penalized by CRA for over-contribution.

TFSA Withdrawals: You can withdraw funds from your TFSA account at any time, for any reason, without having to pay taxes on the withdrawn amount. You are not allowed to contribute more than your TFSA allowable contribution room in any given year, even if you have withdrawn from the account during that year.

TFSA Online Resources

Canada Revenue Agency Official Website
This is the official Canada Revenue Agency (CRA) website pertaining to the Tax-Free Savings Account. You will find more information on TFSAs as well as forms and publications.

Tax-Free Savings Account Calculator
This TFSA calculator estimates the income tax savings you can realize in a TFSA. It compares the future value of an investment in a TFSA with the future value of the same investment made in a taxable account and estimates the total tax savings.

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