Our government introduced the Tax Free Savings Account (TFSA) in 2009. For people who don’t know much about them, these savings accounts are a great way to save your money, and earn income on it, tax-free. Here are some things you need to know about the tax free savings account.
1. How does a TFSA work?
Money you deposit to a Registered Retirement Savings Plan (RRSP) is tax-deductible, but money you deposit to a TFSA is not. Your after-tax cash is deposited into the TFSA, which means that you can withdraw it tax-free.
2. Income earned is tax-free
There is no tax paid on the income earned inside your tax free savings account, so you can invest in anything from GICs to common stocks. When the time comes to take money out, there are no taxes on it. The withdrawals also won’t affect your eligibility for income support programs based on earning levels.
3. There are contribution limits
You are given a $5,000 a year limit, and the unused portion is carried forward to the next year. If you withdraw money from your TFSA account, that amount you withdraw reduces your contribution limit. If you just want to transfer between financial institutions, have the banks do the transfer on your behalf. If they do it, your contribution limit isn’t affected.
4. Compounding investments
We’ve all heard about the “latte factor” when it comes to investing. Socking away whatever you can, while having the advantage of earning tax-free income means that your savings will grow that much larger over time. Start early with tax free savings and reap the rewards.
5. Low risk strategy
You can’t claim capital losses in your TFSA on investments that have declined in value, which means that it’s best to invest in equities with high-yield dividends. The relatively small limits on a TFSA make it difficult to invest in a balanced portfolio, so it also makes sense to choose investments such as exchange-traded funds that represent a broad sample of companies found in a stock market index.
AngellaDykstra is the wife of one and the Mom of three. She is a Chartered
Accountant who uses the right side of her brain as a writer and
photographer. You can find her at her personal site Dutch Blitz.
This has always confused me. Thanks for clearing it up – these tips were easy to understand. Now it just up to me to get into the bank.