Should the Tax Free Savings Account be renamed?
Explaining the TFSA is a conversation I often have with clients and prospective clients. The TFSA is one of the most misunderstood investment plans and I believe it is because the name is wrong. Approximately 10,000,000 Canadians have TFSA’s and unfortunately many believe they are savings accounts in which they can only hold cash reserves. Conversely, most people understand that the Registered Retirement Savings Plan is a plan in which they can hold investments for growth.
- You must be age 18 before you can open a TFSA. Keep this in mind if you want to open such a plan for a child.
- You must be a resident of Canada when you open the TFSA. You cannot make more contributions while living abroad, although you can maintain the account.
- Contribution room in a TFSA is retroactive to 2009, (and to age 18), so if you were 18 that year, you can currently have up to $52,000 invested in a TFSA. (Annual contribution amounts have varied over the years. The current contribution amount for 2017 is $5,500.
- Unused contribution room is never lost. If you withdraw from the account, you can add back to it the following year. Beware penalties if you re-contribute the amount in the same year, as CRA will count that as an over contribution, bearing a penalty of 1% for every month that the extra money stays in your TFSA.
- Other penalties could apply if you trade a lot in your TFSA. Canada Revenue Agency doesn’t mind you earning a lot of money in the TFSA but they might get suspicious if you constantly use it for buying and selling stocks. Think of it as a savings account/plan.
- You can hold the same investments as registered accounts, including mutual funds, segregated funds, stocks, bonds, ETF’s and GIC’s.
- You save on tax by using TFSA’s because the withdrawals of investments and growth are never taxed, just like the sale of a principal residence. Taxes take money away from your family, so deferring and reducing taxes has a great impact on funding your financial goals and dreams.
- You can continue contributing to your TFSA after age 71 when the RRSP must be converted to a RRIF and annual minimum withdrawals must be made and tax paid on these. There is never any minimum withdrawal to a TSFA and no tax is ever paid.