Tax-Free Savings Account & how it can cover your future needs
The beauty of a TFSA or a tax-free savings account is that it allows you to save for any future needs without paying tax on any interest growth within the account or on any withdrawals. The money you investment in your TFSA is after-tax dollars and as long as you are within your contribution limit, your money will grow tax-free and you can withdraw and use your money without paying any tax on the interest gained.
In Canada, the maximum TFSA contribution limit allowed for 2020 is $6,000, and the total limit from 2009 (when TFSA was first introduced) until today is $69,500. The limits for annual contributions slightly change each year according to inflation and some other factors. These can be monitored on the Canadian Revenue Agency contribution page.
If for some reason you exceed the contribution limit on your Tax-free savings account then you will pay a 1% tax penalty on the excess contribution on a monthly basis until the excess is withdrawn. This is something that you want to avoid.
Making contributions toward withdrawing from a Tax-Free Savings Account
It is not too late to start contributing to your TFSA. Since a Tax-free savings account was established in 2009, you have a $69,500 contribution room, and if you have never contributed in the previous years then you can catch up and take advantage of this powerful investment account. However, if you have not been a resident of Canada for an entire year or are under 18 years of age your contribution room won’t be the same.
Unused contributions are carried forward for each year, allowing you to contribute the full amount if you come into money from some investment, inheritance, or increase in income.
The beauty of a Tax-free savings account is, it can hold bonds, stocks, mutual funds, exchange-traded funds, GIC and etc. With the right investment, your money will grow beautifully in a TFSA.
However, keep your investment needs in mind when deciding what to invest in, otherwise, your money may not be as easily accessible as you want. Since TFSA can hold many types of investments, you must always consider the purpose of investing. We have short-term investment goals, long-term investment goals, retirement savings goals and etc., and you must invest accordingly. For example, if the investment purpose is for short-term needs, it must not be invested in any type of locked investment.
TFSA as a retirement savings plan
The general rule is that an RRSP is a better choice for long-term savings or retirement saving plans, whereas a TFSA is great for meeting short-term objectives like emergency funds or making a down payment for a property. This is because you can easily access these funds and they can also be replaced.
Even though an RRSP is a powerful retirement saving plan and it has been built for this specific goal, it does not mean that TFSA can not be used for retirement saving goals. If you have already reached your RRSP contribution limit, then you can use a TFSA to save more money for retirement.
If you are a millennial, TFSA can be a very powerful retirement savings plan for you. Millennials have many years till retirement since the TFSA contribution room will grow every year, they can save up a significant amount by the time they retire. Keep in mind TFSA withdrawal will be tax-free, unlike RRSPs.
Moreover, keep in mind if you earn less than $50,000 per year then TFSA contributions toward your retirement may be wiser for taxation purposes.
If you have the financial means, besides having an individual TFSA and utilizing its tax-free interest feature, you can double your household tax-sheltered savings by opening a TFSA in your spouse’s name and make contributions towards it.
Withdrawing money from a TFSA for emergencies
The tax-free savings account offers flexibility, allowing you to withdraw money without any penalties if you suddenly need it. The amount that you withdraw, is then added to the amount that you can contribute the following year. The contribution amount will not disappear if you cannot contribute in any given year but rolls over. That way your contribution limit expands for later.
Remember, the best way to move a Tax-free savings account from one bank to another is not by making cash withdrawal and deposit, but through a bank transfer otherwise, you may be liable for the tax.
Bequeathing a Tax-free savings account
When opening a TFSA, you are asked to fill in a form and you will also have to provide the name of a substitute holder. In the event of your death, the person that you have named as a substitute holder or successor holder becomes the new account holder allowing the account to continue to remain active. This person can only be your spouse or common-law partner. If that person also has a TFSA account then they can continue to retain to separate accounts or transfer the value from yours to theirs without reducing their own contributions.
You can name anyone as the beneficiary of your Tax-free savings account and upon your death, the funds are paid to the beneficiary and the account will be closed. The substitute holder is just the new account holder but can also be the beneficiary. Any income earned after the original account holder’s death continues to remain tax-free. Once again, if there have been any excess contributions these will be taxed at 1% for as long as they remain in the account. Also note that if you are considering estate planning, it is best to have your TFSA hold in a segregated funds so you can bypass the probate fee.
Find an investment strategy that is for you
Finding the right investment strategy with the proper investment account and funding can be complicated and overwhelming. 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 your TFSA. Whether you have a TFSA account or you are looking to open up one we are here to help.
Contact our expert advisers and start your Tax-free savings account with us today.
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