Great things you can do with your TFSA

Great things you can do with your TFSA

A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think. There are some great things you can do with your TFSA this year – read on!

Backgrounder

The TFSA was first introduced in the 2008 federal budget.

It became available to Canadians for the 2009 calendar year – as of January 1, 2009. Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.

But the “savings” word in the name is very misleading.

Since account introduction in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. 

While this account is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. Consider it like an RRSP account in reverse. 

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Here is summary of many great account benefits:

1. Capital gains and other investment income earned inside the account are not taxed.
2. Withdrawals from the account are tax-free.
3. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, like future Old Age Security (OAS) income.
4. Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
5. While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA. Do it without any income attribution!
6. TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. More details below for you. 
7. The annual contribution limit is indexed to inflation in $500 increments, that happened recently!

and more!

Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:

TFSA contribution limit*—2009 to 2023

Conceivably by now, some couples might be approaching $300,000 in combined invested assets thanks to TFSA assets held and grown inside this powerful account over the last decade+.

What has worked for me/us over the years?

Well, we’ve bought various assets (stocks, ETFs) over the years and this year is nothing different.

We strive to contribute our maximum after-tax dollars to this account, every year.

We avoid withdrawals from this account as much as possible. Instead, we use the money contributed every year to buy and hold equity investments, for wealth-building purposes. I will tell you what I bought near the end of this post!

What types of investments can you own inside the TFSA?

Thankfully lots!

Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings. You can own a number of different types of investments inside the TFSA:

• Cash
• Guaranteed Investment Certificates (GICs)
• Bond funds or bond ETFs
• Individual stocks
• Equity funds or equity ETFs

So, if you haven’t already thought about it, here are some of my favourite ways I tell readers they can use the TFSA. 

1. Save for your kids’ education

If you’ve already saved for kids’ education using a Registered Education Savings Plan (RESP) then you should know your TFSA is a great place to save more for your kids’ education. As you know from my list above, you’ll have zero taxes on the growth within the plan and there will be no tax consequences with this account if your children choose not to go to college or university – like the RESP has.

When your kids become adults, encourage them to open a TFSA in their own name. This way they can start saving and investing tax-free as long and as much as possible.

2. Save for your short-term goals

Want to buy a newer car like I did a few years ago?

Want to travel?

Want to fund some improvements to the house without going into debt?

Do it with tax-free money using your TFSA to park savings for shorter-term expenses.

3. Fund your retirement

This is my/our personal favourite!

My wife and I have been diligently using the TFSA contribution room as a secondary retirement account along with our RRSP – since TFSA Day 1.

Although we’re not ready to retire yet, the TFSA is helping us get there. Contributions to the TFSA make for a great retirement account due to the types of investments you can hold inside this account.  

I’ll share what I bought inside my/our self-directed TFSAs in a bit. We tend to own stocks and low-cost ETFs.

Here are some options to consider when using the TFSA related to retirement:

• If you have already reached your RRSP contribution limit – you may use your TFSA to top up savings! One option you can consider is making RRSP contributions throughout the year and then using the RRSP-generated tax refund to contribute to your TFSA every spring.  This way, you can grow both accounts over time!  
• If you want to retire early, you may not be eligible to receive government or workplace pensions yet (until age 55 or age 60). You can consider using your TFSA assets to bridge the gap between early retirement and when government pensions start. 
• If you have already reached retirement age, and are drawing a government or workplace pension, consider contributing to a TFSA – so you can be more tax-efficient in retirement. For example, most of you know you can’t own an RRSP past the year you turn age 71. (You have to convert it to a Registered Retirement Income Fund (RRIF) or payout annuity by the end of the year you turn 71, or take the RRSP money in cash (and pay tax on it)). Regardless of your age – you can keep your TFSA open – and keep contributing to it. So, take some monies withdrawn from your RRSP or RRIF each year and put that money to work tax-free inside your TFSA. This means you are converting tax-deferred money into tax-free money!

4. Save for future, elder care or family-related costs

Who knows what the future holds. 

This means beyond a general savings account a TFSA can be a great way to invest (and grow) money tax-free for future needs.

For example, say you have aging parents. If you’re not sure about their long-term healthcare costs, you can use your TFSA — or give your parents money to contribute to their TFSAs – to help cover future expenses.

5. Save for your own rainy day

Financial challenges happen from time to time. This means if you lose your job, your family income is compromised, or home emergency repairs are needed – TFSA assets can help you and your family overcomes any rainy day disaster with money already in the bank.

Here are some other Q&As related to the TFSA you should know about!

Q1: Do you need earned income to contribute to a TFSA?

No. In fact, you can have your parents, spouse, partner, grandparent or other family member gift you money for your TFSA every year. Just ask them! 🙂 Again, you need to be 18 years of age or older to own an account. 

Q2: Is there a deadline for TFSA contributions?

No. There is no deadline for a TFSA contribution. You just get more TFSA contribution room every year!

Q3: Where can I find out how much TFSA contribution room I have?

You can confirm your TFSA contribution room by contacting the Canada Revenue Agency (CRA). You can find it online if you are registered for CRA’s “My Account” services. 

For more information, see “Where can I find my TFSA contribution room information?” at canada.ca.

I would also suggest you keep track of your TFSA contributions – this way, if there is an issue or a discrepancy, you can discuss it with CRA or your financial institution. 

Q4: What happens if I over-contribute? Is there a penalty?

Yes. CRA assesses penalties for over-contributions at a rate of 1% per month on the excess contribution.

Q5: Do investment gains in my TFSA affect my contribution room?

No. Investment income earned inside the account do not affect your TFSA contribution room. This means, if you invest wisely over time, you can potentially build significant wealth.

Q6: Can I make withdrawas from my TFSA? What happens?

Again, TFSA withdrawals are tax-free, and you can use the money for any purpose. 

As you have learned above, a nice feature is that amounts you withdraw from your TFSA can be simply replaced in a future tax year. The amount you withdrew (including gains you might have) will be added to your contribution room.

Q7: Can I have more than one TFSA?

For sure. But, you don’t get more personal contribution room. I would suggest keeping things very simple and just open one TFSA self-directed account. 

The challenge with more than one TFSA is you’ll complicate your life by tracking your contributions and withdrawals. If you lose track, it’s a headache to fact-find. If you over-contribute, you’ll pay a penalty to CRA. 

So, open one self-directed TFSA and run with that. 

Q8: When I die, will my TFSA be taxed?

Well, if you name your spouse as the beneficiary without a “successor holder” designation — or if you name any other person or the estate as the beneficiary — the TFSA earnings from your date of death to when the estate is settled could be taxable.

Instead, consider naming an account “successor holder” designation. We set that up years ago…

As a TFSA successor holder – who can only be your spouse or partner:

• the deceased’s TFSA value is not included in their date of death/final income tax return;
• the successor holder will become the new holder of the TFSA immediately upon the deceased’s death;
• the successor holder will receive your TFSA assets, i.e. all earned income/assets up to the date of death sheltered within a TFSA account;
• all of the earned income after the date of death will remain sheltered within the TFSA (a HUGE benefit);
• after taking over ownership of the deceased’s TFSA, the successor holder can transfer all or a portion of the deceased’s TFSA account into their own existing TFSA account without impacting their TFSA contribution room; and
• after taking over ownership of the deceased’s TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.

That’s different than a TFSA beneficiary. 

As a TFSA beneficiary:

• the beneficiary will receive the fair market value of the deceased’s TFSA account free of any income taxes;
• all of the income earned and increase in the TFSA assets values between the date of death and the date of the transfer to the beneficiary is taxable income and must be included in the beneficiary’s income tax return (a major drawback for spouses and common-law partners compared to the option above);
• beneficiaries can contribute a portion or all of the deceased’s TFSA assets up to the limit of their own unused TFSA contribution room; and
• if no beneficiary or successor holder is designated in the TFSA documents or in the deceased’s will, the TFSA assets will be paid to the deceased’s estate and disposed of in accordance with their will.

Again, consider some estate planning with your TFSA!

More reading on this subject can be found here.

Great things you can do with your TFSA summary

There are many great things you can do with your TFSA, in any investing year. For us, we:

• max out contributions to this account, every year.
• we tend to buy and own only equities for long-term growth
• we own dividend paying stocks for ever growing income and capital gains, and
• we own some ETF units for extra diversificaiton. 

What did I buy in my/our TFSAs for 2023??

Well, I landed on buying more BCE stock and low-cost ETF XAW in early January 2023.

It is my hope that our TFSA assets will continue to compound away over time, feeding this great chart 🙂

I hope you consider investing inside this account for your wealth-building power over time.

Your future self will thank you!

Thanks for reading and sharing and let me know if you have any questions on this updated post. 

Mark

What did you buy inside this account, this year? What are you owning inside this account for long-term wealth building including passive income or lazy capital gains growth?