TFSA account or Tax-free savings account came into all Canadian’s lives in 2009. This fantastic investmentment account has been received with great fanfare, and nearly all Canadians love it. The concept is simple: invest within this account, and the income is tax-free. How amazing is that? Thank you, Stephen Harper. These are five essential aspects every Canadian should know about TFSA to maximize their use of this fantastic option.
1. TFSA Eligibility Criteria
The plan enables a Canadian Resident who has reached the age of majority (minimum of 18) and valid SIN (social insurance number) to open a TFSA account. The funds can remain in the account throughout the account holder’s life and can be withdrawn at any time for any purpose.
Unlike other accounts, there are no options for joint and spousal accounts.
2. TFSA Contribution Room
Unlike an RRSP, the maximum annual contribution that can be made to a TFSA is independent of an individual’s earned income. The contribution room is an indexed amount called the TFSA dollar limit. Between 2009 and 2012, the dollar limit was fixed at $5,000. For 2013 and 2014, the TFSA dollar limit was increased to $5,500. In 2015, the limit was increased to $10,000 before falling back to $5,500 in 2016. For 2019, the TFSA dollar limit was increased to $6,000.
For purposes of the TFSA, indexing of the dollar limit is rounded to the nearest $500, meaning the next increase in the dollar limit will be to $6,500.
TFSA contribution room accumulates each year for 18 years of age and older and who are Canadian residents. Like an RRSP, an unused contribution room for a given year is not lost but is carried forward to the following year. This enables an individual who may not have sufficient funds in any one year to maximize their contribution and still make use of the unused room in a future year.
The TFSA goes one step further than an RRSP: eligible withdrawals from a TFSA in a given year are added to the contribution room at the beginning of the following year. In effect, an individual does not lose his or her contribution room. Following an eligible withdrawal, he or she can restore the contribution room that has already been previously used.
However, TFSA contributions are not deductible for tax purposes, and the investments are purchased with after-tax dollars.
3. Investment Options
Eligible investments for a TFSA mirror the qualified investments permitted in other registered investment accounts such as RRSP and RESP. This includes guaranteed investment certificates (GICs), mutual funds, segregated funds, bonds, and securities listed on a designated stock exchange.
Foreign investments are converted to Canadian dollars to report to the CRA, which means that foreign contributions cannot exceed the maximum limit in Canadian dollars.
4. Beneficiary Designation
Provincial legislation dictates whether or not a beneficiary designation can be made on a TFSA. Many jurisdictions have already accounted for this provision. Upon the account holder’s death, the assets in a TFSA where a beneficiary has been designated will be transferred to the beneficiary and do not form part of the deceased holder’s estate; therefore, it will bypass probate.
5. Common Use of TFSA
TFSA can be used for a variety of purposes. Here are examples of a few uses of the TFSA:
Rainy day fund
A TFSA is perfectly suited as an emergency reserve fund. For this reason alone, all eligible individuals should establish a TFSA.
Low-income individuals
The reality is that the TFSA was designed for individuals with relatively low incomes throughout their working years and into retirement, or to use other words. These individuals may not benefit much from RRSP contribution because the deduction in their income would not make much o a difference in their tax return.
Moreover, this income stream at retirement could potentially reduce or eliminate certain income-tested social welfare benefits and preclude the person from claiming certain tax credits. In contrast, the TFSA enables individuals in this situation to build retirement savings accounts without worrying about tax implications and its impact on retirement entitlements.
Where RRSP contributions have been maximized
For those who maximize their RRSP contributions each year, the TFSA provides an alternate tax-advantaged savings vehicle. The TFSA goes beyond tax deferral; it is tax-free.
Individuals saving for a large expenditure
For an individual saving for a car, a dream vacation, a wedding or the purchase of a home or any short- to mid-term expenditure, the TFSA should be considered. Theoretically, the TFSA can serve as a ‘one-stop-shop given that funds accumulated in the plan can be used for any purpose.
In many cases, multiple single-purpose vehicles can now effectively be consolidated into one multi-purpose TFSA (subject to the unique merits of each single-purpose plan, of course). The drawback with the TFSA at this moment and time and for the next several years is the relatively low contribution room.
Our expert investment advisers are fully qualified to help you plan for your investment goals. By taking your short-term, long-term, retirement, liabilities, and other financial goals into consideration.
At Apluswealth, you can find what investment options are available to you, what strategies are suited for your needs, and how you should take advantage of the TFSA for yourself or your family members.
Contact our expert advisors and start your Tax-Free Savings Account with us today.
Email: Contact@AplusWealth.com
Tel: 1-888-461-6120