TFSAs
Gains and investment income in these accounts is never taxed.
The Tax-Free Savings Account (TFSA) is an account registered with the Canada Revenue Agency (CRA) that lets Canadians contribute money each year throughout their lives. Contributions to TFSAs are not tax deductible, but TFSA gains, income, and withdrawals are tax-free.
Opening a TFSA
In British Columbia, individuals 19 or older can open a TFSA. TFSAs offer flexibility in choosing investment options, which can include mutual funds, ETFs, stocks, bonds, and GICs.
When opening a TFSA:
- Understand what types of investments you can purchase through the account (e.g. mutual funds, ETFs, stocks, bonds).
- Understand if you will have access to other companies’ investment products or only to investment products sold by the company that created your account.
- Compare fees and charges related to the investments you purchase in your account. Examples of fees to consider include trading fees, advisory fees, withdrawal fees, account transfer fees, administration fees, and foreign exchange fees.
- If you do not feel confident investing on your own, or if you do not have time to properly research potential investments, then consider working with a registered investment advisor to align your investments with your financial goals.
- If you feel confident investing on your own and are willing to put in the time to properly research potential investments, then consider a self-directed TFSA. Self-directed accounts may provide access to a broader range of potential investments and at lower cost.
Contributing to a TFSA
Contributions and TFSA account fees are not tax-deductible.
There are contribution limits for each year dating back to 2009 when the federal government introduced the TFSA. Unused contribution room carries forward indefinitely.
Withdrawing Funds
You can withdraw funds (whether contributions, gains, or income) tax-free at any time without paying any taxes.
When you withdraw funds, the amount you withdraw is added back to your available contribution room at the start of the next calendar year.
Closing a TFSA
You can close a TFSA without affecting future contribution room. Ensure that transfers or closures are processed correctly to avoid tax implications.
Advantages of a TFSA
TFSAs offer key benefits, including:
- Tax-free growth: Investment earnings, including interest, dividends, and capital gains, are not subject to taxes.
- Flexibility: Funds can be withdrawn tax-free at any time, making TFSAs ideal for short- and long-term goals.
- No income requirement: You don’t need to earn an income to contribute, and there’s no requirement to stop contributing at a certain age.
- Contribution carry-forward: Unused contribution room does not expire, it carries forward indefinitely.
- No impact on federal benefits: Withdrawals don’t affect income-tested benefits like Old Age Security (OAS) or the Canada Child Benefit (CCB).
Disadvantages of an TFSA
While TFSAs offer significant advantages, they also come with some drawbacks to consider:
- No tax deduction: Unlike Registered Retirement Savings Plans (RRSPs), contributions are not tax-deductible.
- High penalties for over-contributions: Exceeding the contribution limit results in penalties of 1% per month on the excess amount.
- Complexity with withdrawals: While withdrawals are tax-free, replacing withdrawn funds requires sufficient contribution room, which can be confusing if you don’t keep track of the funds going in and out of the account.
When is it Optimal to Use a TFSA?
- When you’re building an emergency fund: Its tax-free and flexible withdrawal options make TFSAs ideal for emergency savings.
- When you’re saving for goals, whether short, medium, or long-term: Whether saving for a car, a wedding, a home renovation, or even financial freedom, the ability to grow savings tax-free is advantageous.
- For maximizing retirement savings: For those who have maximized RRSP contributions or want a source of tax-free income in retirement, a TFSA is a valuable complement.
- When you’re investing as a low-income earner: Since contributions aren’t tied to earned income, it’s a great option for students, part-time workers, or retirees.
- For sheltering investment gains: High-growth investments benefit from being in a TFSA because the gains remain tax-free.
Questions About TFSAs
For more information, consult your registered investment advisor or visit the CRA website.