The Tax-Free Savings Account (TFSA) allows Canadians to set aside and grow money tax-free throughout their lifetime. This is a great deal folks. Each year, you likely already know you can contribute up to the pre-defined dollar limit for the calendar year, plus any unused TFSA contribution room from the previous years, and contribute any amount you withdrew from the year before. This account is a great way to save for short-term and long-term goals.
Here are some of the very best things about the TFSA that work for me.
- TFSAs are available to Canadians aged 18+ with no upper age limit to collapse the account unlike other investment accounts. For example, my self-directed Registered Retirement Savings Plan (RRSP) has an age-limit rule applied, the account must be collapsed in the year I turn 71. If things go well financially, I expect to draw down my RRSP before age 60 to take an early retirement and keep my TFSA for as long as I can, churning out tax-free income I can spend.
- There are a wide range of investments you can hold inside the TFSA, pretty much the same as a Registered Retirement Savings Plan (RRSP), as long as you own a self-directed TFSA. Investments can include cash, mutual funds, stocks, Exchange Traded Funds (ETFs), Guaranteed Investment Certificates (GICs) and bonds to name a few investment choices. I use my TFSA exclusively for equities: Canadian dividend-paying stocks, Canadian Real Estate Investment Trusts (REITs) and Canadian ETFs. I expect to use my TFSA for these income-generating assets for years to come.
- You can put money into your spouse’s account, and we do.
- I can use my TFSA as a retirement account, and I do.
- I can put money into the account, anytime, up to calendar year limits, and I do.
- Later on when I want to transfer some investments from my RRSP to my TFSA, I can do so. When this occurs I will dispose of my investments at Fair Market Value (FMV) and that amount will be reported as an RRSP withdrawal, included as income in that tax year. Taxes will also be withheld upon withdrawal but I can claim those on my income tax return. If I choose to take early retirement (rather, if I can retire early) I can consider holding only two personal investments accounts long-term: a non-registered account (that spins off tax-friendly dividends and distributions) and a registered TFSA where money grows and can be withdrawn tax-free.
- My federal income-tested benefits and credits such as Old Age Security (OAS) will not be reduced as a result of the income I earn inside the TFSA or the amount I withdraw out of it.
Banks, insurance companies, credit unions and trust companies can all issue TFSAs so make sure you go out and get yours!
What are your favourite things about the TFSA? What didn’t I mention?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I love the TFSA.. I do trading with it (options ) aswell as invest in primarily TSX stocks however, i have been informed you can still invest in some tax free dividend stocks like UK, some franked AUS stocks and not be penalized…i need to confirm this..
Thnx for the article Mark.
cheers
T
All good, glad you liked the article!
Note one thing I found out when my father died in 2012. The TFSA cease to exist on the day of your death. So, when I sold his stock to distribute the money to the family, I had to write a $3k capital gain in his tax return. Because I sold the stock after he died. So, if you get a cancer or something, think about selling your stock in the TFSA to save the taxes and make sure your kids or whoever inherits actually benefit from the tax free part of of the TFSA.
Sorry to hear about your loss Francois but another great point about estate planning, regarding the TFSA. Thanks for the contribution.
Hi Mark
I have an idea to put extra resources into your spouses name without worrying about attribution using a TFSA. It would work like this:
You deposit as much as you can into your spouses TFSA in the current year. Some time late in December you withdraw all of the funds (sell investments) and put the funds into your spouses regular investment account. I don’t think there would be any attribution but I am not sure. Come January, you contribute what was removed from your spouses TFSA plus the new annual limit. Next December you cash in the TFSA and deposit the proceeds into your spouses regular investment account. The next January you deposit what was withdrawn plus the annual limit into your spouses TFSA. This would continue for as long as you wish.
Do you think this would work with no attribution?
John
My understanding is you can avoid TFSA attribution rules by giving money to your spouse, and she can contribute to her TFSA and thus avoid CRA’s income attribution rules. This way, the TFSA allows both you and your spouse to earn tax-free investment income, regardless of which spouse contributed the funds.
What you are proposing, I know, is something different. To be honest, I’m not sure. I believe transfers to a spouse, any income earned from the original income (secondary income) will be considered income of the spouse. I don’t think there would be any attribution rule broken here with your example but I am not sure; best check with CRA.
I love the increasing amount of the TFSA. They are talking that it might be $6000 next year. I love that however how much u make in there that its completely tax free. So if u build it up to a million mr tax man is not getting any of it!
Heck ya. Happy to avoid the tax man, legally! 🙂
Difficult to say more.
The most interesting stuff is really the ability to get money out and in pretty easily.
Furthermore, if your tax bracket (income over $82k) make it interesting to put money in the RRSP, you can transfer easily from TSFA and fill back it later, mainly when the transfer was done end of December!
Good point about the RRSP and tax bracket threshold.
Now the question is, will the conservative government carry out its promise to double the TFSA contribution room once the budget is balanced? Because that day is coming closer…
So you think that will be in 2016 Brian? Time will tell I guess.. 🙂
Great post. Thanks. The 2 things that’s I don’t like about the TFSA is:
1. Poorly named. People I speak to always think a TFSA is for bank savings account. Tax-Free Investment Account would be better.
2. The 15% foreign withholding tax.
I hope the government continues to raise the maximum limits.
Warrdog,
I hear ya. Thanks for the comment.
As for the TFSA naming convention, here is what I think:
https://www.myownadvisor.ca/name-changes-needed-canadian-financial-accounts/
Yes, 15% withholding tax. Ugh. Can we do something to improve relationships with our friends South-Side?
Mark
Ahhhh… TFSA’s… Love’em! Amazed that many still don’t understand them, have them maxed out or invest within them, as many just hold cash in ’em if they’ve got ’em… Guess I’m kind of glad, as if everyone truly understood the benefits, the government might change course on them because of loss of the tax money. Cheers.
As you know Phil, the savvy investor will do everything they can to maximize their TFSA and get as much growth and compounding working for them sooner than later. What are your thoughts on the government changing the rules? Say, when $100k of contribution room approaches? Do you think they’ll eventually put a cap on this account? (I hope not.)
Depends on the economic backdrop I guess. Could the rules change? Sure, but will they? well as I said if only a handful are using them, then probably not. As to a cap, well lets just say, I’d see it maxing out somewhere where the RRSP cap is… say somewhere below $20K contribution room, indexed annually. I think the government will need to think through its long term strategy in how it plans to pay down the countries debt, and eventually when they will need to look for money, TFSA’s might be the spot. That said, for of us who are taking advantage of what they offer us, I’m sure we’ll be ahead of the game, at which time it might affect us, but we’ll still be in a better place… I’m currently up $10K alone in my TFSA this year, and we’ve got a few more months to go… Love’em, that’s all I can say! – Cheers.
Somewhere around $20k contribution room, per year, indexed annually would be great for the TFSA long-term.
I’m up about 10-15% this year in the TFSA, not quite the big gains you have! Well done.
My plan for retirement is to drain the RRSP first and then the non-reg account, leaving our TFSAs as the last accounts standing. It doesn’t get any sweeter than tax free returns!
You read my mind Peter, same order for me…withdraw from RRSP, then non-reg. and lastly our TFSAs is the last-man standing.
Ya, I’m not really sure why the RRSP vs TFSA debate rages on. For that vast mojority of the population the TFSA wins as the starting point. There are exceptions, but it is so flexible and easy to use that it’s definitely the smarter choice most of the time.
I like your strategy of winding down your RRSP and then living off the tax free income from the TFSA. Nice!
Thanks for the comment Stephen..the way I see it, the TFSA works for everyone but the RRSP works for the majority of folks.
Winding down the RRSP is the plan, but it’s still a long ways off!
I love my TFSAs and have been keeping our savings in our TFSAs for years now. Our emergency fund is in one TFSA which is highly and easily accessible; the rest of our savings are in ETFs with a Questrade TFSA. I love the TFSA and I am so glad it was created!
The best thing since sliced…well, almost that good 🙂 Thanks for the comment!
Not only do my wife and I contribute the max to our TFSAs but we also gift money to our daughter so she can invest in hers. As an only child she will inherit it all anyways so we might as well give some of it to her now and get her started. I have to give credit to the government for this as well as the RDSP. Between these two programs, our daughter will be more financially secure than without them.
You’re way ahead in thinking for most people Lloyd…smart to put your daughter’s future in TFSAs.
It was great that the Canadian government introduced TFSA. I think this may be Flaherty’s legacy. TFSA is a great vehicle to save for retirement. 🙂
I do wonder how if the government will introduce some sort of contribution restrictions to younger people growing up. As far as I know the limit is counted starting from 2008. For someone who was born in 2008, by the time they are 18, how does the contribution limit work? I can’t imagine the government would just say “OK, you now have $100k+ tax free contribution room.
from the CRA website: “You cannot open a TFSA or contribute to one until you turn 18. However, when you turn 18, you will be able to contribute up to the full TFSA dollar limit for that year.”
Correct Jeffrey and thanks for that reference!
Thanks for pointing out. I missed that part. 🙂
All good 🙂
I recall the first contribution year was 2009, as of January 1st, 2009, adult Canadians had $5,000 to invest.
I’ve been wondering the same thing tawcan but I could foresee where the majority of Canadians cannot max out their TFSA every year. Only those with good paying jobs, or good savers, or both, could do so and over time, because those folks are in the minority the account rules would not change. Time will tell!
I like how the gains are carried forward with a TFSA. If I have a gain of $14k in one year and withdraw that amount, it gets added as contribution room the following year (on top of the annual $5500 limit)
Truly a great benefit Dan. I might take advantage of this some year by withdrawing some CDN dividend-paying stocks; move those assets non-reg., and then for the U.S. dividend-payers I want to keep, move the assets from RRSP > TFSA and keep the U.S. stocks in the TFSA.
Mark, wouldn’t it be a bad idea to keep US stocks in a TFSA due to withholding tax that would not be present with an RRSP?
Yes, there is 15% withholding tax inside the TFSA for U.S. stocks but I figure in another 15 years, I’ll be relying on income for retirement so I figure a small withholding tax isn’t too bad; I’m not intending to touch the capital. If things go well I intend to shutting down my RRSP around age 50 or 55, the former in another 10 years or so for an early retirement.
Great post educating the public on the benefits of TFSA, Mark. Its the best thing ever that has happened to Canadians recently…but ppl have just continued whining about it that its such a small contribution room. Now that a few years have passed – ppl have started realizing the power of tax-free growth.
Best
R2R
I couldn’t have written it any better 🙂 Thanks for the comment and all your blog support R2R!