What is a TFSA?
A TFSA (Tax-Free Savings Account) is a unique savings vehicle that allows Canadians age 18 and over to save money, tax-free. It is a registered account that allows for investment income including capital gains, dividends, and interest to grow and be withdrawn without paying additional taxes. Although contributions cannot be used to reduce your taxable income, withdrawals are also tax-free.
TFSAs are not a traditional “savings” account and ideally, shouldn’t be treated as one. Rather than cash, actual investment vehicles (stocks, bonds, etc.) are a much more appropriate and efficient way to properly use TFSAs.
Many people confuse TFSAs with RRSPs. The main difference is that RRSP contributions can be used to reduce your taxable income, whereas TFSA contributions cannot. On the flip side, when you withdraw from an RRSP, that counts towards your taxable income, but withdrawing from a TFSA has no tax consequences. So on the contribution end, RRSPs have the advantage, but on the withdrawal end, TFSAs have the advantage. Or think of it this way: RRSPs have tax implications at both ends (contributing and withdrawing), while TFSAs have no tax implications (on either end) by comparison.
The TFSA was introduced in the Canadian budget in 2008 and came into effect in January 2009. Since then, roughly half of Canadians have set up TFSA accounts for various purposes, ranging from financing large purchases, emergencies, retirement, or simply as a way to avoid paying tax on the interest.
» Benefits of opening a TFSA
Every calendar year (starting on January 1st) Canadians can contribute a limit for the year, in addition to any unused amounts from previous years, and any amounts withdrawn the year before. From 2009-2012 the annual contribution limit was $5000. In 2013 that limit was raised to $5500 per year, with 2015 having a one-time increase to $10,000. Depending on when you became eligible and started making contributions, you could have accumulated several tens of thousands of unused contribution room.
» More information about TFSA contribution room
Canadians age 18 and over who have a valid Social Insurance Number (SIN) are eligible to open a TFSA. Depending on your province of residence there may be some limitations for those under 19 (the age of majority in some provinces) which may affect your ability to contribute for that initial year.
» Requirements to open a TFSA account