If you were a resident of Canada, aged 18 in 2009 until today, did you know you had the opportunity to save thousands of dollars in a tax free account?
- The Tax Free Savings Account (TFSA) is a misnomer. Read why here. A TFSA can be much more than a cash savings account.
- The TFSA is an account, not a mutual fund.
- There are no such things as a spousal TFSA (not yet).
- Contributions to your TFSA are not tax deductible, so you cannot use contributions to reduce your taxable income.
- TFSAs are highly effective for every Canadian regardless of their tax bracket.
- After you select investments for the account, the income you earn on those investments inside the TFSA can grow tax-free.
- If/when you decide to take money out of the account, money can be withdrawn tax-free.
- Contributions to a TFSA can occur throughout the year.
- There are contribution limits for a TFSA, and most Canadians should strive to maximize their TFSA contributions.
- Contribution limits have nothing to do with your annual income.
- There are penalties if you over-contribute to your TFSA.
- Unused TFSA contribution room can be carried forward in future calendar years.
- You can be as rich as you think: if/when you take money out of the account you do not have to pay tax on it.
- If you want to contribute investments “in-kind” to your TFSA, you can, but you are considered to have sold investments for their fair market value before doing so and may need to pay a capital gain.
- Every adult Canadian should take advantage of the TFSA.
These are just some of the TFSA facts.
Why TFSAs should matter to you
As referenced above, there are a couple great tax benefits TFSAs provide Canadian investors: income on investments inside the TFSA can grow tax-free and if/when you decide to withdraw money from this account, you can do so tax-free. Unlike RRSPs where major benefit is tax-deferred growth, every Canadian should own a TFSA and consider using this account for more than a cash savings account. For most Canadians, to realize the major benefits of this account, they should strive to maximize their TFSA contributions every year, have a bias for low-cost, diversified investments inside this account and avoid making withdrawals from this account for as long as possible. For further reading, check out this post here.
Do you own a TFSA? If so, what do you use this account for? If not, what are you waiting for?