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TFSA – Not Your Traditional Savings Account

What is a TFSA?

A flexible investment account, the TFSA allows you to earn investment income (including capital gains) tax free. The savings will grow tax free throughout your lifetime, and you can use the savings for any purpose. It is not a traditional savings account, rather another plan type, just as Registered Retirement Savings Plans (RRSPs) or Registered Education Savings Plans (RESPs) are plan types.

Used for a wide variety of savings needs, ranging from buying a home, saving for education, or saving for retirement, the sooner you open a TFSA the more time you will have to grow your investments tax free.

 

Some features and benefits of the TFSA:

  • Available to individuals who are residents of Canada and are over 18 years of age.
  • Contributions annually are up to $5500, not based on earned income. Each member of a couple can contribute separately. This can be an income splitting opportunity.
  • Can be used for a wide variety of savings, including trips, education, retirement, emergencies or any other savings goals you may have.
  • The investment income, including capital gains, earned in the TFSA is not taxed, even when withdrawn. Also, unused contribution room is carried forward and can be used in future years.
  • You can re-contribute to the plan in the future up to the allowable limit if you withdraw funds.
  • Neither income earned in a TFSA nor withdrawals affects your eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit.
  • You can provide funds to your spouse or common-law partner to invest in their TFSA. You can save together and contribute to their plan, up to the annual allowable limit.
  • A TFSA can generally be transferred to a spouse or common-law partner upon death.
  • If you don’t use your entire TFSA contribution room in a given year, you are able to carry forward the unused contribution room to future years.
  • Seniors can benefit from the TFSA as contributions after the age of 71 do not have to be converted to a retirement vehicle.

 

Should I use a TFSA or an RRSP?

Both an RRSP and a TFSA offer tax advantages by allowing you to accumulate investment income tax free within the plan or the account, but they have some differences:

  1. Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings contributions are not deductible.
  2. Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account are not included in your income – they are tax free.

 

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