By popular demand, here are the Top 10 Most Common Questions about your Tax-Free Savings Account
1) What is a TFSA?
It stands for Tax-Free Savings Account, started in the year 2009 and allows Canadians the ability to save and invest money tax-free.
2) Who is Eligible for/can Contribute to a Tax-Free Savings Account?
To open and contribute to a TFSA you must be a Canadian resident, have a social insurance number, and be 18 years of age or older.
3) Where and how do you open a Tax-Free Savings Account?
You can open a TFSA at any bank or credit union in Canada, as well as through a multitude of online brokerage accounts. Simply fill out their online form, call, or visit your nearest branch location.
Here are the signup links for some of the most popular account providers in Canada. Click on your bank's logo to learn more:
4) What is better: a TFSA or RRSP?
Deciding where to put your money depends entirely on your financial situation and goals. Since each account has different benefits and characteristics I’ve put together a short quiz to help you determine where to put your cash.
Instructions: Choose the answers that best represent your current situation. For each answer, you'll get a recommendation, either the RRSP or Tax-Free Savings Account. Use these recommendations to determine which account is best for you.
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How did you make out?
It's very likely you have a mix of recommendations for both the TFSA and RRSP. In this case, look at where the majority of the recommendations fall. Are there more RRSP than tax-free recommendations? This will tell you where to focus the majority of your contributions, however, don't completely ignore the other side.
If your recommendations are mixed, it's likely beneficial to contribute to both accounts if you can. Sitting down with a tax advisor can help clarify how best to divide and allocate your savings.
One strategy to utilize both accounts (if available) is to maximize your RRSP contributions so that you generate a nice big tax refund at the end of the year. Then, use the RRSP refund to top-up your tax-free account.
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5) What is the TFSA Limit/Contribution Room for 2018/2019?
Each year you can add an additional $5,500 to your tax-free account (with the exception of the years 2009 through 2012 where the limit was only $5,000, and 2015 where the limit was $10,000).
The following chart shows the cumulative total since the TFSA began in 2009:
So, as of the year 2018, you can have up to $57,500 in your tax-free account, even if you’ve never contributed in previous years, or didn’t contribute the maximum amount in those previous years.
Everyone has this amount of room no matter what. As well, you can carry forward any unused contribution room indefinitely into future years, so don't worry about losing it if you don’t use it.
6) How do withdrawals work, and how much can I withdraw?
Withdrawals are incredibly simple. Each year you can withdraw as much as you want. If/when you want to put the money back, you simply have to wait until January 1st of the following year.
For example, if you’ve maxed your TFSA at $57,500 and you take out $10,000 to buy a car, you can put the $10,000 back into your tax-free account on January 1st of next year.
In addition, come January 1st, you’ll also get another $5,500 in contribution room added to your cumulative total, so actually, you can put $15,500 into your account on January 1st.
7) Are contributions tax deductible, and, are withdrawals taxable?
Any contribution you make to your tax-free account is made with money you’ve already paid tax on, therefore, unlike an RRSP the money you contribute can’t be written off as a tax deduction.
As for withdrawals, there are no tax penalties for taking money out of your TFSA, which means you can take cash out at any time of the year without having to pay tax on it.
8) What types of investments can be held inside the TFSA?
Don't let the name "Savings Account" fool you. Most types of investments can be held inside your tax-free account, including stocks, bonds, GIC’s, cash, mutual funds, and ETF’s. So, if you've got a hot stock tip make sure to buy it inside your TFSA!
9) Can the TFSA hold US stocks and/or be in US dollars?
Absolutely! You can open a US Dollar tax-free account, letting you buy and sell US stocks as well as hold US cash.
This is a great option if you want to get in on Apple, Google, or any other US stock we can’t buy here in Canada (not to forget the favourable exchange rate!). Simply call your bank and they’ll set it up for you.
As for taxes, any capital gains you make on US investments inside your TFSA are tax-free in both Canada and the US. The only tax you'll pay is 15% on any dividends from US investments, which is automatically deducted from your dividend cheques, thus, no need to worry about paying or reporting any US investment income on your tax return – super easy!
10) Will the Liberals reduce or eliminate the TFSA?
In 2015 the Conservative government increased the annual contribution limit from $5,500 to $10,000. This was a major benefit to middle-class Canadian’s as it allowed them the opportunity to save and earn more money while paying less in tax.
Unfortunately, when the new Liberal government came into power, they reduced the limit back down to $5,500, contrary to popular demand.
As for future reductions (or eliminating the TFSA altogether), the Liberal government has given no indication of doing so and continues to show support for the TFSA at the current $5,500 contribution limit.
Still have more questions? LET ME KNOW IN THE COMMENTS BELOw!
Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions.
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