Before we look at all the TFSA facts you need to know, let’s do a quick recap of the Tax-Free Savings Account.
What Is a TFSA?
The tax-free savings account (TFSA), introduced in 2009, is a relatively recent account where you can grow your money tax-free.
One constraint is that you are limited to a specific annual contribution limit reviewed annually by the federal government.
The TFSA rules are the same for everyone regardless of income and you must be a Canadian citizen or a resident of Canada.
How Does a TFSA Work?
Once you reach the age of 18, you are eligible to open a TFSA. You can open a TFSA at nearly any financial institutions but generally, it’s good practice to open your TFSA account with a trading platform.
All major banks offer online trading platform but there are also a couple of independent trading platforms worth consideration such as Questrade and Qtrade.
Once you have an account, you contribute money into the account and you have the choice on how you invest it. It’s very different from a normal bank account where your money just sit there.
With a TFSA, all your investment grow tax-free and you can also withdraw your money tax-free. That means you don’t pay taxes on the money you make and you also do not pay taxes when you withdraw it.
How to Open a TFSA and Start Investing
As long as you are over 18 years old and can open a trading account, you are set to go.
With Questrade, you can probably be set within a week. The biggest challenge you will have is not opening an account, it’s to decide on what to invest.
Investing money has risks and it’s a journey. You must think retirement here and not a big purchase unless it’s years down the road.
You can reach the million-dollar portfolio with just a TFSA. It’s simple, just check out the table below on how you can achieve that.
Can You Have More Than One TFSA?
You can have more than one TFSA account, but you are responsible for knowing how much you contribute in aggregate and not exceed the your limit for the year. This is just like a registered retirement savings plan (RRSP).
TFSA Investment Options
You may be tempted to use your TFSA as an emergency fund but that would be a mistake. Due to the tax-free nature of the account, it’s a great investment account. The name is a misnomer unfortunately.
With your TFSA account, you invest in the following. It’s nearly everything you can hold in a registered retirement savings plan (RRSP).
- GICs (Guaranteed Investment Certificate)
- Bonds,
- Mutual Funds,
- ETFs (Exchange-Traded Funds)
- Stocks.
If you are getting started, have a look at the beginner portfolio.
5 Facts on TFSA and Taxes
1. Do You Pay Taxes on a TFSA?
The short answer is no. The longer answer is also no. The Tax-Free Savings Account is an account where you pay no taxes on your income within the account and no taxes on the withdrawal.
The only exclusion is for active traders using the account to shield their active trading from paying taxes. Active traders are seen as doing business which is taxable.
2. Do You Pay Taxes on Dividends Earned in a TFSA?
The short answer is no for dividend from Canadian companies.
The long answer is that foreign countries such as the USA will withhold 15% tax on your dividend from US corporations.
3. Are TFSA Contributions Deductible on Your Tax Return?
No, you cannot deduct your TFSA contributions.
The rationale is that you can withdrawals from your TFSA are tax tax-free and you can contribute the withdrawals back to your TFSA for more tax-free growth.
The tax-free growth is the benefit which is why choosing a TFSA for an emergency fund is a very bad decision.
4. Can You Use a TFSA for Income Splitting?
Income splitting tend to focus on withdrawals to even out taxes across both spouses.
In the case of a TFSA, you want to approach it like a spousal RRSP by ensuring both accounts have similar amounts but it’s much less important with a TFSA as you can simply withdraw from it.
However, as a family, you want to maximize the tax-free accounts whenever possible as it can help minimize taxes down the road but it’s not quite income splitting.
5. Can You Have Your Spouse as a Successor or Beneficiary?
When you open a TFSA account, you are generally asked if you want your spouse, or common-law partner, as successor.
If you aren’t married or have a common-law partner, you will have to fill a beneficiary designation form. A beneficiary is different from a successor when it comes to estate planning.
At some point, you will need to focus on estate planning and will need a will to declare how you want your assets distributed.
6 Facts on TFSA Contributions
1. How Much Can You Put in a TFSA
The total contribution you can make depends on your age but assuming, you were 18 when the TFSA was introduced, you can contribute the maximum which is $81,500.
You can easily calculate your contribution by following the contribution allowance formula.
2. What Is the TFSA Limit for 2022
Every year, there is a limit you can contribution to your TFSA as defined by the federal government. For 2022, the contribution limit is $6,000.
For more details on the limits and how much you can contribute total, you can read all the TFSA contribution details along with some growth expectations.
3. What Were the TFSA Limits Over the Years?
Here are the details outlining the historical contribution limits
– 2009 to 2012 = $5,000.
– 2013 and 2014 = $5,500.
– 2015 = $10,000.
– 2016 to 2018 = $5,500.
– 2019 to 2021 = $6,000.
You can see the potential return of your contributions in a more detailed table.
4. What If You Have Never Contributed to a TFSA Before?
It’s never too late to start investing as long as you are 18 years old or older.
You can read many perspectives on the TFSA and my perspective is that the TFSA should be your primary investment account and once it’s filled, you can focus on your RRSP. Personally, I have more than doubled my TFSA as seen in the table above.
5. What Can You Do With Unused TFSA Contribution Room?
First, don’t stress as you don’t lose your unused contribution.
Second, try to put $25 a week if you can, just to stash a little away and then invest it.
Some online trading platforms let you invest for $0 per transaction which is perfect when you can invest only small amounts.
6. Can You Lose Your TFSA Contribution Room?
No, you cannot lose your contribution and it’s also independent of your income.
4 Facts on TFSA Withdrawals
1. Can You Withdraw from Your TFSA at Any Time?
Yes, there are no timeline aside from understanding the rules for putting the money back in your TFSA.
2. How Much Can You Withdraw from Your TFSA Each Year?
As much as you have in your TFSA. There are no regulations as to how much you can withdraw.
3. Can You Put Back Your TFSA Withdrawals?
Yes, you can re-contribute your TFSA withdrawals but there is a rule to follow otherwise you may face an over-contribution penalty.
You must wait until the year after you make the withdrawal to re-contribute your withdrawal.
4. What Happens If You Over-Contribute to Your TFSA?
There is a penalty for over-contributing in the form of interest. You can read the details from the CRA but you want to avoid it. The CRA has 3 examples covering excess contribution to a TFSA and the interest calculation.