In 2009, the Canadian federal government introduced a savings vehicle called the tax-free savings account (TFSA). The TFSA allows Canadian residents who are 18 years of age or older with a valid Canadian social insurance number to set money aside tax-free during their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. However, any amount contributed as well as any income generated in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
An individual can only contribute up to their TFSA contribution room. Unused TFSA contribution room can be carried forward to later years. The total amount of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year.
In 2009 and subsequent years through 2012, the TFSA dollar limit was $5,000 per year. For the years 2013 and 2014, the TFSA dollar limit is $5,500. In 2015 the max was $10,000 and in 2016 $5,500. So all total Maximum to date (2009-2016 = $46,500)
So here’s a little education on what a TFSA is and how it compares to an RRSP.
What’s the Difference?
At what age can I start contributing?
For an RRSP you can contribute only if you have declared income and file a tax return. With a TFSA you can open an account if you are Canadian and 18 years old.
How much can I contribute each year?
With an RRSP that depends on your income – each year you can only invest 18% of your income (minus any pension that you may be contributing). With a TFSA you can contribute up to $46,500 per year. (to Dec 2016 – max total since 2009)
Is my contribution tax deductible?
Yes if it is an RRSP, and you may get a refund, but if you take money out of an RRSP later – it will subject to tax. With a TFSA it doesn’t reduce your taxable income (you may not need a deduction in that year) but if you decide to withdraw money – you don’t pay tax.
Can I “replace” my contribution if I withdraw from the account?
This is in my opinion is a key advantage of a TFSA… When you withdraw money you automatically create contribution room for the next year. This means you can replace what you withdraw in the future without penalty. Only with the Home-Buyers Plan and the Life-Long Learning Plan can you withdraw from an RRSP and pay it back.
In RRSP they grow “tax-deferred”, meaning you will pay tax upon withdrawal. With a TFSA your savings grow tax-free!
Can I withdraw savings for any reason?
Yes with a TFSA! I have many clients who use this for vacations – or to pay for home renovations – buy a car… whatever. With an RRSP a withdrawal is considered earned income and taxes are withheld at the time of the withdrawal (unless you participate to the Home Buyer’s Plan or Lifelong Learning Plan).
I really believe that this is a great alternative to help you to get into the investment world – not only safely – but until you get comfortable – the penalties for withdrawing funds are ‘user friendly’ so to speak. Talk to an experienced financial advisor to see what the best fit for you is – don’t get advice from a teller at a bank or credit union – it’s your money – make educated decisions! (And most importantly – A PLAN!)
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