Sunday, 17 January 2016

Let's Talk TFSA's

It's that time of year where questions about TFSA's come up over and over again so today we're going get into the nitty gritty of them and why they can be so useful. 

The government introduced TFSA's in 2009 and they are available to all Canadians who are over 18 years old. Each year you get additional contribution room in your TFSA so in 2016 the total contribution room is $46,500. If you didn't turn 18 until after 2009 your room would start adding up in the year you turned 18. The contributions started at $5,000/year and were set to grow with inflation but only in $500 allotments, hence the increase to $5,500 in 2013. Then the Conservative's decided to increase the contribution room to $10,000/year in 2015 but that was withdrawn by the new Liberal government so we're back down to $5,500 this year.

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
TOTAL - $46,500

When you put money in a TFSA you buy a variety of investments within that account; like stocks, mutual funds, bonds, GIC's, etc. This will depend a bit on where you hold the account because some institutions are limited in what they can hold. Now this is where the advantage of a TFSA comes into play, when you buy something in your account and it grows you will be able to sell the holding at a gain and not pay any tax on it when you pull it out to spend. In a normal non-registered account that growth would be counted towards your income and you would pay tax on it. 

Another good thing about TFSA's is that you can withdraw funds from them at any time and you will get that contribution room back the FOLLOWING year. This makes them a good place to save towards both short term and long term goals. 

One of the things that comes up quite a bit, especially in our current market conditions, is moving investments from a non-registered account into your TFSA. You can absolutely do this and do not need to sell off your investment prior the transfer. What will happen is that 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. This is just like selling it but you wouldn't, you would still hold the investment in your TFSA and any future growth would then be tax free. If the holding is at a loss you wouldn'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? I hope so but feel free to post questions. 

If you want information on whether it would be better for you to contribute to an RRSP or a TFSA you can check this post where I talk more about that. 

TFSA's are a really good tool to use for your savings and I recommend opening one up if you've got a goal you're savings towards. The process is simple, you can usually just do it online with your bank or through your financial advisor. 

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