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A Tax-Free Savings Account (TFSA) is a new kind of registered account introduced by the government.
The idea behind TFSAs is to make the benefits of tax-free savings available to as many Canadians as possible. For that reason, TFSAs are available to every Canadian resident who is 18 years of age or older and has a Social Insurance Number (SIN).
If you live in British Columbia, Newfoundland and Labrador, Nova Scotia or New Brunswick, then you can’t actually open a TFSA until you are 19, which is the age of majority in those provinces. However, you will accumulate contribution room from the time you are 18.
An RSP is designed specifically to provide you with income after you retire. Your contribution limit is based on your income and the contributions you make are tax-deductible, but you do pay tax on the money when you receive it as income.
A TFSA is not designed specifically for retirement, but to help you save money for a wide range of goals. The amount you can contribute is not based on your income and your contributions are not tax-deductible. You can withdraw your money any time you want it, and you don’t pay tax on those withdrawals. You also don’t lose contribution room when you make a withdrawal – you can recontribute that amount to your TFSA the following year or any year after that.
Contributions
Currently, you can contribute up to $5,000 a year to your TFSA. However, that contribution limit is indexed to inflation, which means that it will rise with the cost of living.
You can carry forward any uncontributed amounts into future years indefinitely. So, for example, if the limit is $5,000 a year and this year you contributed only $2,000, next year you could contribute up to $8,000 (includes the uncontributed $3,000 from this year).
If, next year, you had only $5,000 to contribute, you can again carry the $3,000 over to the year after, and on through the years until you use it.
Every year, the government will calculate how much TFSA contribution room you have available. You will be informed of your contribution limit when you receive your T1 Notice of Assessment.
If you contribute more than your contribution limit, you will pay a penalty of 1% per month on the excess amount.
No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RSP. However, you can give your spouse money, which they can then contribute to their own TFSA. Any income your spouse earns on the money in their TFSA is theirs and will not be attributed back to you.
Withdrawals
You can withdraw funds from your TFSA any time you want – you don’t have to reach a certain age before you withdraw your money.
No, you don’t have to pay tax on the amounts you withdraw.
TFSA withdrawals don’t count as taxable income, so they don’t affect Federal income-tested benefits or tax credits you may receive, including the Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit or the Age Credit. Also, TFSA withdrawals don’t reduce benefits based on your income level, such as Old Age Security, the Guaranteed Income Supplement or Employment Insurance benefits.
Anything you want. You could wait until you retire and use it to supplement retirement income you have from pensions, RSPs or other sources, but you can also use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home.
No, you never lose your contribution room – in fact, you can recontribute amounts you have withdrawn. You have to wait until the next year to recontribute, but you can carry forward the recontribution room indefinitely.
For example, say you contribute $5,000 to your TFSA in January 2009 and another $5,000 in January 2010. Then, in the summer of 2010, you withdraw $3,000 to pay for some repairs to your home. You can’t recontribute that $3,000 in 2010, but in 2011 it will be added to your contribution room again, meaning you could contribute up to $8,000 in 2011.
No, you can take out as much of your money as you want, whenever you want, and use it for anything you choose.
Taxation
No, you don’t pay any tax on the investment income you earn in the account, and you don’t pay income tax on the amounts you withdraw.
No, you can’t deduct contributions to your TFSA from your income as you can with your RSP contributions.
Investments
You can hold many of the same investments you hold in your RSP, including segregated funds, mutual funds, GICs, stocks and bonds.
Note: The above information about the Tax-Free Savings Account is based on the information currently available from the Canadian government. To learn more or to check for updates, visit the TFSA information page on the Canada Revenue Agency website.
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