TFSA’s: The Basics
A Tax-Free Savings Account, more commonly known as a TFSA, is a savings that can hold cash as well as investments. The TFSA was introduced to Canadians in 2009 as a tax-free account that could. Any Canadian over the age of 18 who has a SIN number can open a TFSA.
How a TFSA Works
The TFSA is a simple account to understand because it works similarly to any other savings account…with a few important differences. First and foremost, there are limits to how much you can deposit into the account. The maximum you can contribute to a TFSA each year is determined by the contribution limit set forth by the CRA for that year. Canadians start earning their contribution room at age 18 and can be used retroactively. For example, if you are 25 and have never used your TFSA, you can contribute the total amount of contribution room that you have earned since age 18.
Second, unlike other savings accounts, the TFSA can hold investments such as stocks, bonds, mutual funds, and GICs. The growth from these investments is exempt from tax so your TFSA can earn interest, dividends, or capital gains without limitation, and without a tax bill. Withdrawals from TFSAs are paid tax free to the contract holder.
TFSAs are easy to understand and administer and they are a well-suited option for almost every investor. They are suitable for both short- and long-term investing goals due to the ease of withdrawals. The main advantage of a TFSA is that it allows investors to benefit from tax-free growth of their investment. This is an invaluable tool that investors have available to them to grow their wealth. While there are no immediate tax breaks to contribute to the TFSA, investors will benefit over time from tax free withdrawals from the account.
The contribution room is limited and there are stiff penalties for overcontribution. It is important to track how much you are putting into your TFSA every year to ensure you are not going over your allowable deposits.
Understanding Contribution Limits
The contribution limit for 2022 is $6000 and the allowable lifetime limit, if you have never contributed to a TFSA, is $81,500. In 2023 the contribution limit will be $6500.
This limit is determined each year by the CRA, and it is not uncommon for the limit to stay the same from year to year. Each person over the age of 18 in Canada is subject to the same contribution limits, regardless of how much you make. The contribution room can be carried forward indefinitely in years it is not used. Any withdrawals from your TFSA are added to your TFSA contribution limit in the following year, so you can recontribute the amount you withdrew in a previous year. It is allowable to have more than one TFSA in Canada, so extra attention to contribution limits in important if you have multiple accounts.
The Bottom Line
TFSA’s are one of the most effective financial tools Canadians have available to them and should not be reduced to simple savings accounts. TFSA’s can provide significant investing opportunities and tax advantages that will help you reach your goals faster.