Benefits of a Tax Free Savings Account (TFSA)
Are you a saver? Setting money aside for a home reno or a bucket list adventure? Maybe you don’t have any RRSP contribution room left and need another place to save for your retirement. Whatever you are saving for, you should explore the benefits of using a Tax Free Savings Account (TFSA).
What is a TFSA?
A TFSA is a registered account that Canadian residents aged 18 and over can contribute to up to the annual limit of $6000. Your contribution room can be carried forward if you don’t use it, and withdrawals can be put back in future years.
If you contribute to your TFSA, don’t expect a tax deduction for it like you get with your RRSP contributions. But don’t worry, there are great tax savings to be had with TFSAs as well.
Investment income earned inside your TFSA is tax-free. Interest, dividends and capital gains that you had to report to CRA for your non-registered savings and investments are now sheltered from the taxman. The added benefit is that it remains tax-free even when you take it out. Unlike an RRSP, you are not taxed on any withdrawals from a TFSA, making it a very flexible planning tool.
TFSA vs RRSPs
If you are still confused about whether a TFSA or an RRSP is the right tool for saving, hopefully this chart will help.
|For virtually all savings and investment objectives||Primarily for retirement savings|
|Contributions are made with after-tax income||Contributions are tax deductible|
|Contribution room is added back |
when withdrawals are made
|Contribution room is used up when |
withdrawals are made
|Withdrawals are tax free||Withdrawals are added to income and taxed at |
your current rate
|No requirement to withdraw at any age||Must be converted to a RRIF by age 71; |
withdrawals after that age are mandated
according to a schedule based on age
|Contributions can be made any time |
for those age 18 and older
|Contributions cease at age 71|
TFSAs can hold the same investments as other registered accounts, including:
· Mutual Funds
· Segregated Funds
Still wondering if the TFSA is for you? Talk to a professional advisor today, as they can help you find the right tool to fit your savings goals.