This year’s higher limit is just one great reason to revisit TFSAs
Canadians love Tax-Free Savings Accounts (TFSAs). And no wonder — with tax-free earnings and tax-free withdrawals, what’s not to like? And this year, there’s even more to like: the annual contribution limit for 2019 rises to $6,000, up from $5,500 last year.
So, if you’ve never contributed, haven’t contributed in a while, or if you have contribution room to spare, now is a great time to reacquaint yourself with this flexible savings and investment vehicle.
Despite its name, a TFSA is not actually a savings account — it is an investment account, with restrictions on how much money you can put in and take out. The account can hold a wide variety of investments, including common investments like Guaranteed Investment Certificates, mutual funds, or even stocks and bonds.
The big attraction of TFSAs as a savings tool is that money placed in a TFSA will never be taxed, regardless of how much of a return it earns, making it a powerful way to meet financial goals, be they short-term ones like saving for a vacation or a down payment on a home, or long-term ones like saving for your retirement.
However, unlike Registered Retirement Savings Plans (RRSPs), contributions to a TFSA are not tax-deductible.
There are limits on annual contributions, and these have fluctuated over the years. The good news here is that contribution limits “roll over” or accumulate, meaning that if you never contributed before (and were at least 18 years of age in 2009), you could put up to $63,500 in right now. There are penalties for over-contributions, so it’s worthwhile to keep track of your totals.
There are also rules regarding withdrawals: you can withdraw any amount at any time — and with no tax implications. You can even re-contribute the amount you withdrew, but not during the same calendar year. If making a re-contribution, make sure you’re following this rule or you may face penalties.
How do you use TFSAs effectively to meeting your financial and savings goals? That really depends on your personal goals and what other investments you have in place.
For instance, if saving for a short-term goal, you may want to choose investments that are highly liquid so you can get your money when you need it. You may also want investments focussed on capital preservation, as you may not have time to recover from any downturn in the markets.
If using a TFSA as part of your retirement savings regime, it’s beneficial to coordinate your investments across both your TFSA and RRSP (and potentially any pensions) to maximize the tax planning available. Remember that while the investments returns in both accounts grow free of tax while in the account, a withdrawal from an RRSP will be treated as income for tax purposes.
Clearly, TFSAs are a simple and powerful way to make the most of your savings. With some professional advice and investment planning, they can also be an important part of building your financial success over the short and long term.