Myths about TFSA’s
Because the TFSA is still relatively new there are still some misconceptions out there. Here’s some of the more common ones:
“I need a job in order to have a TFSA.”
Not true! Unlike an RRSP, where your contribution limit is tied to your income, there is no such link with a TFSA. Anyone over 18 can open a TFSA, even students, retirees, and the self-employed. You can even be 100% unemployed and have zero income and still open, make trades within, and withdraw money from a TFSA.
“A TFSA will affect my child tax benefits, OAS, GIS, or GST rebates.”
The money in your TFSA is tax-free, which means you can withdraw it at any time and it won’t count towards your taxable income (with a few exceptions, the most notable being foreign withholding tax if you hold non-Canadian stock). This means if you need to stay below a certain income limit in order to stay eligible for certain benefits, you can rest easy knowing that your TFSA money won’t count.
“Only the rich can afford a TFSA.”
Not true! While the annual limit is currently $5500, nothing says you have to use all this limit (although if you can afford to, do it!). You can open a TFSA with as little as $100 (some types of investments may require a $500 minimum), and you can stop right there if you can’t afford anymore. There is no rule saying you have to contribute every year, or you have to contribute the maximum. Put in what you can!
“A TFSA is essentially a glorified savings account.”
No! While you can theoretically treat it as a savings account (put money in, take money out, repeat as you wish), it’s better-used as an investment account where you put money in, let it grow, and withdraw it for specific reasons. Remember, your money (and interest) inside a TFSA is tax-free. If you have a garden-variety savings account, and make $50 in interest, you’ll be taxed on that. If you did the same inside a TFSA that $50 would be tax-free!
“I can’t get at my TFSA money whenever I want.”
Depending on what your TFSA is invested in, this may or may not be true. If you have your money tied up inside GICs or bonds with a maturity date, you can’t really get at the money until that date passes. Other types of investments (cash, ETFs, and stocks) have no maturity date attached to them so you are free to get at the money whenever you wish. So if you want to be able to get at your money quickly, spread it out a bit to include investments with no maturity date.
“Each of my TFSA accounts has its own contribution limit.”
Not true! While you can indeed have as many TFSAs as you like, your annual contribution limit remains the same, whether you have 1 TFSA or 3. So if your annual limit is $5500 and you have 3 accounts, you aren’t allowed to contribute $5500 x 3 = $16,500. It’s still only a max of $5500, spread out over those 5 accounts!
“If I withdraw money from my TFSA it can be used as credit towards my contribution limit.”
Wrong! Any contribution activity in your account counts, even if you withdrew money in between. So if you contributed $5000 in one year, then withdrew $3000 for a home renovation, then re-contributed $2000 later on that same year, you actually contributed $7000 in that year. You can’t use the $3000 withdrawal as “credit” towards lowering your contributions. Doing multiple contributions and withdrawals could easily put you over your annual limit, so to be on the safe side, wait until the following year to put that money back.