Tax-Free Savings Accounts (TFSAs) should be on your personal savings radar.
Since they were first introduced by the federal government in 2009, TFSAs have been widely acknowledged as a great vehicle for tax-free savings growth. To make sure you get every TFSA benefit, here is what you need to know about them.
Every Canadian resident over 18 years of age is eligible to open a TFSA. Contributions to investments held within a TFSA are not tax deductible but do grow on a tax-free basis.
The annual TFSA contribution limit is indexed to inflation in $500 increments and in 2013, the Canada Revenue Agency increased the limit to $5,500, where it remains for 2015.
You’ll maximize the value of your TFSA by making the most of all available contribution room, but even if you don’t use all your contribution room every year, it accumulates year after year, so you can use it in the future.
If you have never had a TFSA account and have been a Canadian resident and 18 years of age since 2009, you will have $31,000 in unused TFSA contribution room.
If you already have a TFSA, your 2015 annual contribution room is calculated by taking: The annual dollar limit for 2015 of $5,500.
Plus the amount of withdrawals from 2014 (excluding withdrawals of excess contributions, qualifying transfers, or other specified contributions).
Plus any unused contribution room from 2014.
If you make a withdrawal, the earliest you can earn back your TFSA contribution room is the first day of the year after the TFSA withdrawal was made.
If you contribute more than your allowable TFSA contribution room at any time during the year in which you made a withdrawal, you will be considered to have over-contributed and will incur tax penalties.
TFSA investments are generally the same as those available for RRSPs, including mutual funds, guaranteed investment certificates (GICs), securities listed on a designated stock exchange and government or corporate bonds.
Withdrawals from a TFSA do not affect eligibility for income-tested benefits such as Old Age Security (OAS).
A TFSA can be a good choice for both short- and long-term financial goals, providing a ready source of emergency funds, a good way to save for everything from a new car to a dream vacation or a down payment on a new home, saving taxes on your non-registered investments, and adding to your retirement savings.
Andy Erickson is the division director with Investors Group, Vernon. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.