A tax-free savings account is a type of investment account that allows individuals to earn interest on their money without paying taxes. This article will introduce you to the TFSA and provide you with a few tips on how to use it.
A tax-free savings account or a TFSA is a type of investment account that allows you to save money without paying any taxes on the interest earned.
TFSAs, or Tax-Free Savings Accounts, are still a relatively new idea, having been established in the Canadian government’s 2008 budget and just being available to customers from the beginning of 2009. As a consequence, many Canadians are ignorant of or under-informed about TSFAs and the benefits they provide, causing them to lose out on an easy and accessible method to maximize their earnings and investments.
This article is for you if you’re one of the estimated 80% of Canadians who have no idea what a TFSA is or how to establish one of your own. Everything you need to know about TFSAs is listed below:
What is a Tax-Free Savings Account (TFSA)?
A tax-free savings account, despite its name, is an investment account accessible to Canadian residents via financial institutions and independent brokers that are backed by the government. TFSAs were created to assist Canadians in saving money by allowing them to invest in a variety of assets such as cash, equities, bonds, dividends, guaranteed investment certificates, mutual funds, and even savings accounts. Any money you put into the account is tax-free, so the profits you earn on your TFSA investments are completely yours, even if you remove the money.
Who may open a TFSA account?
You must be the age of majority in the province or territory where you live and have a valid social insurance number to establish a tax-free savings account. Individuals who are 18 years or older in jurisdictions where the age of majority is above 18 will accrue extra contribution space towards their future TFSA for each year until they achieve the age of majority in their jurisdiction.
Non-residents of Canada can keep their pre-existing TFSAs during their time as non-residents if they regularly live outside of the country or spend less than 183 days per tax year within the country and have no residential ties such as a Canadian bank account, personal property, a home, a spouse, dependents, social ties, or medical insurance.
What Is a TFSA and How Does It Work?
We’ve previously touched on this, but a tax-free savings account is simple to understand. You’ll first establish an account, then put contributions into it in the form of cash deposits or different investments up to the maximum yearly contribution limit. Then, ideally, your money will increase as a result of the returns.
You may take money out of your TFSA at any time, but you should be aware of your contribution limitations before doing so, since you may not be able to put the money back in without penalty if you change your mind.
That’s all there is to know about TFSAs and how they operate. Of course, there’s more to learn about them, but we’ll go into the details later.
What are the benefits of keeping a TFSA?
The primary advantage of establishing and maintaining a TFSA is that any growth or returns on the money and assets you contribute remain tax-free, even if you remove them. As a result, a TFSA is a must-have for any investor, or indeed anybody who wants to make the most of their money and take charge of their own finances.
There’s no reason not to invest after you’ve placed a deposit into your account since you may withdraw it at any time, for any reason, without penalty. You may even redeposit money that you’ve already taken out, but if the deposit would exceed your yearly contribution restrictions, you’ll have to wait until the following year to avoid being charged a penalty.
TSFAs provide an extra advantage to retirees. Any money you remove from your account isn’t considered income, so it won’t affect any benefits you may be getting, such as the Canadian Pension Plan or Old Age Security. If you aren’t yet retired, keep this in mind as you contemplate or maintain your TFSA; you will never regret putting more money down to offer security and comfort when you can no longer work.
Don’t be reluctant to put money into your tax-free savings account as part of your retirement strategy. There is a mechanism in place to guarantee that the rest of your money get to your designated beneficiary, successor, or estate if anything happens to you before you are able to utilize the whole amount you have contributed.
Most people assume that their spouse or common-law partner would be their successor, but you may choose anybody as a beneficiary. You’ll need to choose a trustee to handle the account until the child reaches the age of majority if you choose a minor as your beneficiary.
How to Open a TFSA Account
Opening your own tax-free savings account is a straightforward and generally painless procedure. If you satisfy all of the criteria, you should contact your financial institution or credit union to open up your tax-free savings account. We suggest Questrade, Tangerine, or Wealthsimple for this. You must next give your name, date of birth, and social insurance number to whatever service provider you have chosen in order for them to register your qualifying arrangement for a TFSA. To establish your account, you may need to submit extra supporting papers, but after that, you’re good to go!
TFSAs come in a variety of shapes and sizes.
An annuity contract TFSA, an arrangement in trust TFSA, a deposit TFSA, and a self-directed TFSA are the four kinds of tax-free savings accounts accessible to you.
The first three kinds are known as “Regular TFSAs,” which are accounts that are established via a banking or investment institution. The kinds of assets you may keep in a TFSA that is established via an institution are typically restricted; you will usually be limited to the investment types provided, issued, and maintained by the institution with whom you started your account. This isn’t inherently a negative thing, but it’s something to think about while opening an account.
A self-directed TFSA is one that is opened with the help of a broker or financial advisor. This kind of TFSA enables you to invest in a far broader range of eligible assets, independent of provider.
Anyone who fulfills the basic criteria for establishing a TFSA is allowed to create numerous TFSA accounts without penalty, so why not jump in and explore your options?
What is the maximum amount you can put into your TFSA?
Contribution limits have fluctuated from year to year since the TFSA program’s inception in 2009. The donation maximum for 2019 and 2020 has been increased to $6000, up from $5,500 in 2016 and 2018. The contribution limit for TFSAs hit a new high of $10,000 in 2015, almost double the previous high of $5,500 in 2013 and 2014. The donation limit was established at $6000 for the first four years of the program, from 2009 to 2012.
If you establish a TFSA in 2019 without having previously contributed to one, your contribution limit for the year will include the $5,500 from 2018 plus the maximum of $6000 for 2019, for a total contribution limit of $11,500 for the year. Withdrawals will be added to the following year’s contribution limit, up to the maximum of the previous year’s contribution limit.
What kind of investments are permitted in a TFSA?
As previously stated, the types of assets you may keep in your TFSA vary depending on the account type and financial institution with which you open it, but in general, your TFSA can contain any investments that are permitted in a registered retirement savings plan. Bonds, cash, guaranteed investment certificates, foreign funds, mutual funds, listed securities, and transfers from your RRSP are examples of these investments.
Self-directed TFSAs managed via a broker have fewer restrictions and may hold a broader range of assets, including annuity contracts, debt obligations, qualifying corporate shares, exchange-traded funds, instalment receipts, mortgages, partnership and royalty units, among others.
Speak to your financial institution or investment broker for additional information on what investments your TFSA may contain.
Is it possible to take money out of your TFSA?
Yes, you may withdraw money from your TFSA at any time without penalty. However, some investment types have their own set of product limitations, such as investment maturity dates.
Any money taken out of your TSFA account may be redeposited the following year without impacting your contribution limitations.
What happens if you put too much money into your TFSA?
When you over-contribute to your TFSA, whether on purpose or by mistake, the Canada Revenue Agency charges a 1% penalty for each month that your account stays in excess, whole or partial. To fix the problem, you’ll need to withdraw the money in your access account, or you may wait until it’s covered by your TFSA’s extra contribution space.
Our top three TFSA recommendations
With all of this new knowledge in mind, you’re definitely itching to open your own TFSA account. Our top three suggestions for establishing and maintaining a tax-free savings account are as follows:
Wealthsimple is an excellent location to establish or transfer an existing TFSA, since it charges just 0.50 percent on top of the cost of existing ETFs, which typically average 0.20 percent, for a total of 0.70 percent, far below the usual yearly rate of 2%. Wealthsimple also provides a free TFSA monitoring tool that allows you to manage the ins and outs of your account without needing to keep up with the most recent CRA regulations and contribution limits.
The firm also employs award-winning methods and cutting-edge technology to assist you in creating the ideal personalized investment portfolio that maximizes profits while minimizing risk.
If that wasn’t enough to pique your attention, Wealthsimple also provides users with 24/7 access to their staff of highly trained portfolio managers.
Tangerine, which offers tax-free savings accounts with a high interest rate, is another excellent candidate for your TFSA. When you establish a TFSA with tangerine, you’ll get 2.75 percent interest for the first six months and 0.70 percent for the rest of your life. Tangerine’s TFSAs have no minimum account balances and no annual fees, which may be extremely beneficial when you’re just getting started. If you’re already a bank member, you may even set up automatic donations from your chequing account to your account.
Tangerine also has a tool to help you keep track of your progress toward your investing and donation objectives.
Last but not least, there’s Questrade. Questrade is Canada’s fastest-growing online broker, offering TFSA accounts with no minimum deposit, no annual fees, and no restriction on the number of accounts you may open. When you’re ready to start investing in your TSFA, they have a low minimum of $1000 and among of the lowest trading costs in the industry, beginning at $4.95 per trade.
You can’t go wrong with any of these service providers; they’re all high-quality services that provide you with a completely safe, secure, and easy-to-use platform to manage your TFSA and investments, and unlike opening a TFSA with a traditional financial institution, they provide you with much more flexibility and access to expert help and resources.
A tax free savings account is a type of retirement account that can only be used for educational expenses. There are many benefits to having one, such as tax-free growth and withdrawals. Reference: what is a tax free savings account that can only be used for educational expenses.
Frequently Asked Questions
What is the catch with TFSA?
TFSA is a free-to-play game that has no paywalls or in app purchases.
What are the disadvantages of a tax free savings account?
The disadvantages of a tax free savings account are that you cannot earn any interest on the funds in your account, and you can only withdraw money from it once per year.
How do I avoid tax on my TFSA?
To avoid tax on your TFSA, you must use it for its intended purpose. You cannot withdraw funds from your TFSA without incurring a penalty.
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