The Tax-Free Savings Account (TFSA) program was introduced by the Canadian government in 2009 as an additional, and alternate, way to save money for the short-term and long-term. A TFSA is a unique savings account. Any money that is put into a TFSA is tax-free, as is the income earned through interest. Every year there is a limit on how much money you can put into a TFSA. In 2018 that amount is $5,500, which is decided, yearly, based on the indexation adjustment for personal income tax. You can remove money from your TFSA at any time, however you cannot put any funds over the yearly limit back into a TFSA in the same calendar year.
For example, if you put the full $5,500 into your TFSA in 2018, and remove $1000 within the same year, you cannot put that money back into your TFSA until 2019, because you already maxed out your contributions. Compounding TFSA contributions since 2009, when the program was conceived, brings the total amount of money that can be deposited into a TFSA to $57,500. This is how much money that you can contribute to your TFSA if you were 18 or older in 2009. The year that a person turns 18, and when they get a valid SIN number, is the first year they may participate in the program. Someone who turned 18 in 2010 can only deposit an accrued $52,500, they cannot deposit $5,000 for 2009 as they were too young.
Tax Free – not Tax Sheltered
Having a TFSA means that your funds deposited will not be taxed. Investment earnings not made through a TFSA, Registered Retirement Savings Plan (RRSP), or a Registered Education Savings Plan (RESP) are taxed, every year, at 100% – they are considered income and no exceptions are made for these funds. When saving money in an RRSP or a RESP the funds are considered to be tax sheltered, not tax free. Income that is made on these investments does not have to be paid yearly, giving it a chance to grow, but all income made on these investments must be paid when it is eventually withdrawn. This is why TFSAs are so unique, and should be taken advantage of by everyone over the age of 18. Unlike RRSPs, which you cannot contribute to after the age of 71, TFSAs have no maximum age limit.
Does not impact your benefits
TFSAs also have no impact on your government benefits. You can also contribute to your spouse’s account, and they to yours; and the market value of your TFSA, on the date of your death, is passed on tax-free.
There are downsides to a TFSA. For one, you cannot open a TFSA until you are 18, while you can open an RRSP once you begin to make an income. TFSAs are also inferior to the RRSP as a savings account for retirement if you are in a higher tax bracket now than you think you will be in the future.
RRSPs are protected from creditors in the event of a bankruptcy, all funds in a TFSA are not, and if you make the wrong investments you could lose money in the long term. TFSAs can also become confusing, even for those well versed in the financial world. For example, there is a lot of confusion surrounding contribution limits, and there are stiff penalties for going over.
TFSAs are an amazing prospect for anyone to save their money, whether their goals are short-term or long-term. They are an opportunity that should not be missed, but because of how tricky they can be to navigate there are people who shy away. Compounded with the immense changes to Canadian tax policy in 2018, TFSAs are more daunting than ever before. Let SWCPAS provide you with the professional and personal business accounting that you need, so that you can take advantage of TFSAs, and every financial opportunity available to you.