What Is A Tax-Free Savings Account?
A Tax-Free Savings Account (TFSA) is an account that does not impose any taxes on anything that is deposited into the account (different from an RRSP due to the TFSA accepting post-tax contributions). These contributions can range from capital gains and interest to dividends. This account can be opened by anyone over the age of 18 within Canada for whatever purpose they have.
The main benefit is that anyone over the age of 18 can create this account. They can also withdraw money tax-free at any time. For example Jeff and John both decide that they want to make their money work for them by putting it in an investment account. John puts his money straight into an investment account whereas Jeff does the same thing but within a TFSA.
If both were to deposit $5,500.00 (max contribution per year) and let it sit there for 1 year gaining 10% interest per year, they would have accumulated $6,050.00 in total. If John were to withdraw his money he would be taxed on the $550.00 profit by capital gains tax. However, since Jeff’s investments were in a TFSA he can withdraw that full amount without worry of any penalties.
How Much Can I Contribute?
As previously stated the maximum amount of contribution in one given year is $5,500.00. However, if an individual has not contributed for the past year and decides that they want to this year, they are able to carry that contribution room over. For example, you have not contributed anything in 2017 but want to contribute in 2018. You can contribute $5,500.00 x 2 (2017 and 2018 contribution limits) = $11,000.00. However, you do not acquire contribution room if you are a non-resident of Canada.
Over contribution essentially means putting more than the allotted $5,500.00 per year in. If this is the case a 1% penalty will be levied on the excess amount until the contribution is equal to or less than $5,500.00.
Withdrawals are a bit tricky so follow closely. This can save a lot of people the hassle of being taxed on over-contribution. As previously stated, everyone has a contribution limit of $5,500.00. If Timmy contributes $4,000.00 to his TFSA he now how only $1,500.00 contribution room left for the year ($5,500 – $4,000 = $1,500). Therefore, if Timmy wants to put the $4,000.00 back into the TFSA he would be unable to. He only has $1,500.00 contribution room left due to him initially withdrawing the $4,000.00.
Christopher is just a man on a mission to help those around him gain financial success. Obsessed with writing about all things finance, this GTA native is constantly learning and sharing his experiences with others.