Let’s Talk TFSA’s

What you need to know about Tax-Free Savings Accounts
Who out there currently invests in a TFSA? Ideally, everyone has their hand raised, but I know that’s not the case. Maybe you’re still catching up on debt repayment or have been focusing on RRSP’s instead. In today’s post, I’m going to talk about why TFSA’s are so great and hopefully even convince a few of you to open one. 
 
The government introduced TFSA’s in 2009 as an alternative to RRSP’s and as a way to encourage Canadians to save more. Anyone who is over 18 and a Canadian citizen can open a TFSA. Most financial institutions will offer them so you can go to your local bank or get in touch with your existing financial advisor. The big perk of the TFSA is that the money you deposit can grow tax-free inside the account. Usually, if you were to invest in the same funds outside of a TFSA, you would be taxed on any interest, dividend payments or capital gains every year. Within the TFSA you could double your initial investment and not have to pay one penny in tax. If you are used to making RRSP contributions, you know that you can use RRSP contributions as a deduction on your taxes. Unfortunately, TFSA’s don’t give you the same benefit. TFSA’s will allow your money to grow tax-free and you never have to pay tax on withdrawals. RRSP’s give you a tax deduction and let your money grow tax-free, but you do have to pay tax on withdrawals. 

At this point, you might be wondering if you should be contributing to a TFSA instead of an RRSP and that’s a valid question. So valid that I’ve actually written an entire post about it, you can find that here if you’re interested.

There are limitations to how much you can contribute to a TFSA each year. In 2009 when the program was initially announced, you were given $5,000 of contribution room. Each subsequent year you get additional contribution room in your TFSA so in 2017 the total contribution room is $52,000. There have been some variations in the contribution limits each year, but I’ve broken them all down for you below. One thing to note, if you didn’t turn 18 until after 2009 your room would only start adding up in the year you turned 18. So if you turned 18 in 2012, you would only have room from 2012 forward ($37,000).

The yearly breakdown has gone as follows: 
 
2009 – $5,000
2010 – $5,000
2011 – $5,000
2012 – $5,000
2013 – $5,500
2014 – $5,500
2015 – $10,000
2016 – $5,500
2017 – $5,500
TOTAL – $52,000
 
When you put money in a TFSA, you are able to purchase a variety of investments, just like in an RRSP. You can hold stocks, mutual funds, bonds, GIC’s, etc. This will depend a bit on where you set-up the account as some institutions are limited in what they can hold. TFSA’s are ideal for a variety of saving strategies (retirement, travel, down payment, etc.) but you won’t be able to take full advantage of the perks if you leave the money sitting in cash. TFSA’s do their job when your money grows, so if it’s not growing (or at a very low-interest rate), you aren’t really getting the benefit. This is the reason I wouldn’t recommend using your TFSA for your emergency fund. You always want your emergency to be secure and accessible (which means uninvested), so it’s best to save the TFSA for actual investing. 
 
Another benefit of the TFSA is that you can withdraw funds at any time and you actually earn back your contribution room. You do have to wait to re-deposit the funds until the following calendar year, but you will get back the full amount you withdrew. Even if your TFSA grew to more than the total contribution amount and you pulled out the whole thing, you’d still get back that withdrawal amount. As an example, you could have made an initial deposit of $40,000 in 2016 which grew to $70,000. If you withdrew the whole $70,000 in 2017, you would be able to deposit that full $70,000 in 2018. This makes your TFSA a good place to save for both short term and long term goals. 
 
If you currently hold investments in a non-registered account, it might make sense to start shifting them over to a TFSA (if you don’t already have one). You can absolutely do this and do not need to sell off your investment prior the transfer. Transferring the investment from a non-reg account to a TFSA is considered a taxable event, so you’ll have to even up with CRA on any capital gains, but you’ll be able to continue to hold the investment, and any future growth within the TFSA will be tax-free. If the investment you hold is worth more today than when you bought it you will have to pay the tax on that gain when it’s moved. If the holding is at a loss, you won’t pay any tax, but you also wouldn’t get to use the loss when filing your taxes. Usually, when you sell something at a loss, you can use it to balance out some gains you have. This means that the best time to move investments into a TFSA is when it is as close as possible to the price you bought it at. Crystal clear? 
 
TFSA’s are a really great tool for saving money, and they provide you with a lot more flexibility than an RRSP and better tax treatment than a non-registered account. If you have any questions or have a TFSA strategy you’d like to share, please do so in the comments. 

What you need to know about Tax-Free Savings Accounts

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