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account (that spins off tax-friendly dividends and distributions) and a registered TFSA where money grows and can be withdrawn tax-free.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?