In 2009, the Canadian government introduced a registered plan called the Tax Free Savings Account (TFSA). They are designed to help Canadians save for various short or long-term goals. You must be at least 18 years of age and have a Social Insurance Number (SIN) to set up a TFSA.
The name Tax Free Savings Account is misleading. May people think they can only invest their savings in a “Savings Account”. The truth is, TFSA’s can be invested in numerous vehicles including: mutual funds, segregated funds and bank accounts. They can be invested using conservative or aggressive investment strategies or anywhere in between.
Is a Tax Free Savings Account for me?
TFSAs are ideal for:
- Canadians making less than $50,000 per year
- Self Employed individuals with dividend income
- Someone expecting large pension income
- Salaried employee looking for flexibility
- Someone saving for a short term goal (i.e. buying a car) or long term (i.e. retirement)
As of 2020, if you have never contributed to a TFSA, you would have $69,500 in contribution room. Each year the contribution limit will be increased by $6,000. To avoid penalties from Revenue Canada, you will need to ensure you don’t exceed your contribution limit.
Unlike the RRSP, contributions to a TFSA are not deductible for tax purposes, but they have significant benefits. The investment growth is not taxable and withdrawals are not taxable. This makes make them ideal for short and long-term savings of your after tax dollars. You never need to worry about the growth affecting your income. It’s a great compliment to pension income. It also won’t affect your income calculation for Guaranteed Income Supplement (GIS) and Old Age Security (OAS). As the name indicates: it is Tax Free!
Contact Heidi for more information.