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ReturnIn this article:
- The advantages of the TFSA
- Differences between the RRSP
- How to determine your contribution limit
- The consequences of over-contribution
- Eligibility requirements
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Since its introduction, the Tax-Free Savings Account (TFSA) has gained much popularity among Canadians. A survey released in the summer of 2019 even suggested that more people had a TFSA (57%) than an RRSP (52%).
Whether you’re retired, a young professional or simply looking to diversify your saving strategy, here’s the key to understanding the TFSA and its benefits.
Investment income is tax-sheltered
Capital gains, dividends and interests earned on your TFSA are not taxed at the time of withdrawal. This is how it differs from the RRSP, where withdrawals are added to your annual income. However, unlike RRSP contributions, TFSA contributions are not tax deductible.
A useful investment vehicle for all horizons
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While it can be useful for long-term financial planning, the flexibility of the TFSA is what makes it a great tool to achieve short-term objectives.
Many savers use it to build a safety net, raise a down-payment, plan major renovations, start a business, or even plan a trip. The options are unlimited since you do not have to provide a reason to withdraw any amount from your TFSA.
As an investment vehicle and not a financial product, TFSA’s can include stocks, Guaranteed Investment Certificates (GICs), bonds, mutual funds and cash deposits.
The contribution limit is cumulative
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If you do not use up your contribution room during the fiscal year, any unused portion is carried forward to the next one.
As a result, an investor who has never opened a TFSA has accumulated $63,500 in contribution room from 2009 to 2019,provided they meet the conditions to be eligible during this period. Requirements are discussed below.
Here are the annual contribution limits since 2009.
• 2009 to 2012: $5,000 per year
• 2013 and 2014: $5,500 per year
• 2015: $ 10,000 a year
• 2016 to 2018: $5,500 per year
• 2019: $6,000 a year
• 2020: $6,000 per year
Withdrawals increase the limit for the following year
For example, if you withdraw $4,000 from your TFSA in 2019, this amount will be added to your contribution limit for 2020.
But be careful!
Any excess contributions that remain in the TFSA will be taxed at a monthly rate of 1%.
Here’s an example:
For a surplus of $2,000 from November to December 2019, you will have to pay $40 in taxes ($20 per month). In January, your contribution limit for 2020 will be reduced by $2,000.
Since it’s possible to hold more than one account, it’s important to keep track of all your transactions in any given year in order to stay within your contribution limit.
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TFSA Requirements
- Be 18-years old (there’s no maximum age)
- Have a Social Insurance Number
Therefore, the person who turned 18 in 2012 must calculate their unused contribution room starting in 2012.
Note that you can gift a contribution to your spouse’s TFSA, but only they will benefit.
Is this the right time for you to contribute to a TFSA?
Our expert financial advisers at Groupe MCB are here to help and can assist you in determining the best saving strategy based on your needs and objectives.
Make an appointment with one of our advisors today!
