A TFSA is a Tax-Free Savings Account. The Tax-Free Savings Account differs from most methods of saving money in a way that you can probably guess at – it’s tax-free! That means contributions to the account are tax-free. What’s more? Withdrawals from the account are also tax free. In this way, TFSAs differ substantially from other types of investments like RRSPs. There are a variety of rules and regulations that govern who can open a TFSA, how much you can contribute each year, and how withdrawals might affect your contribution limits.
One of the advantages of TFSAs is that they can be used to hold a wide variety of different investments; in other words, you can use them for more than just saving cash. Bonds, mutual funds, and even certain stock exchange investments can be put into a TFSA. You should know that on some types of investments, you may incur loss. Loss does not affect your contribution limits. In other words, when you lose money on an investment in your TFSA, it doesn’t mean you can invest more in your TFSA next year.
Residents and non-residents of Canada can open a TFSA – the accounts are available to anyone 18 or older with a valid Social Insurance Number. Non-residents should know, however, that their TFSA contributions may be subject to a 1% penalty for as long as they remain non-residents of Canada. There are a variety of factors that could make someone eligible to be considered a resident of Canada for TFSA purposes even if they’re not presently living in the country. For more information on this, see “Who Can Open a TFSA?”
The amount that you can contribute to your TFSAs will vary from year to year. While you can open multiple TFSAs, the contribution limit applies across all TFSAs. In other words, if you have a contribution limit of $6000 and you invest $3000 into one TFSA and $3000 into another, you can’t invest any more money without seeing a penalty. When you withdraw money from a TFSA, it doesn’t affect the contribution limit for that year but it can affect the contribution limit for the next year. What’s more, when you have a contribution limit that you don’t reach, the difference between what you put in and the limit rolls over to the next year. In other words, if you had a limit of $6000 and you only invest $3000, you can contribute $3000 more in the next year. Also, if you withdraw $1000 from your TFSA, you’ll be able to contribute $1000 more next year.
You should note that everything being discussed in this post, including the very existence of TFSAs, is at the whim of Parliament. In other words, contribution limits, how withdrawals affect TFSAs, and what (if any) contributions or withdrawals can be taxed can change from year to year. Accounting firms in Winnipeg are always keeping track of the rules and regulations surrounding TFSAs. They’re a wonderful tool for your overall investment portfolio. Want to learn how to reach your investment goals in the best ways? Get in touch with us.