Tax Free Investing – TFSAs 101

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?

TFSA facts

  • The Tax Free Savings Account (TFSA) is a misnomer.  Read why hereA 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. Read on for my debate on this subject here. 
  • 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  • If/when you decide to take money out of the account, money can be withdrawn tax-free.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 as much as possible. 
  • 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.
  • The amount you withdraw from your TFSA this year, can be re-contributed next year along with any new contribution room. Amazing. 
  • 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?

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm 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. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

8 Responses to "Tax Free Investing – TFSAs 101"

  1. Hi Mark , thanks for all the info provided in your blog/newsletter.
    I have a question for you that I can not find an answer to. My sister recently moved back to Canada (later part of 2018), after being away for a very long time , she is still a Canadian citizen , what I would like to know is how much is she allowed to put into a tfsa at this stage. She is over 60.
    Thanks in advance for your answer.

    Reply
    1. Hey T – not tax advice of course, I cannot do that….but my general understanding is you cannot contribute to your TFSA as a non-resident. Once you leave Canada, you may become a non-resident based on certain criteria.

      So, after being away from “a very long time” then assuming she had non-resident status then she could only put in the TFSA contributions relevant to her resident status. So, if that’s only a couple of years then that’s that based on TFSA contribution room for those years she was a resident only.

      She would definitely not be able to max out the account to say $75,500 since TFSA inception if she was not a resident for all eligible contribution years.
      https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html#mgrnt

      A quick call to CRA to firm up dates and rules for her situation should help!

      Reply
  2. A small but significant correction: in certain jurisdictions, including BC, you cannot take out a TFSA account until you attain the age of majority, which in BC is 19, not 18 . Nevertheless, the Feds still give you the allowance, so that you may invest for two years, i.e.$12,000, when you become 19. So, no excuse not to put away $6000 when you attain 18, if you can.

    Reply
  3. My wife and I have maxed out our TFSAs each year. We have a good selection of dividend stocks in them as well as one years worth GICs short term. We are within a couple of years of converting some small RRSPs so the TFSAs are the sliced bread of our savings now. We are retired on pension and don’t need the money at the moment so we feel this is the best thing they have come out with. Keep up the good work and info Mark.
    Cheers
    Doc

    Reply
    1. Sounds like a great plan Doc. My wife and I are trying to ensure our TFSAs are maxed out every year. Mine is done for 2013, wife’s is getting there.

      We hold ETFs, REITs and CDN dividend stocks in ours.

      As a retiree on a pension, I think any RRSP withdrawals and money you don’t need, should go into TFSA. This way, as you get older, TFSA withdrawals are not income-tested and TFSAs can continue to churn out income for you.

      Well done.
      Mark

      Reply

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