Why you should use a TFSA to enjoy a quality retirement
The New Year is upon us this week. Once more, I turn my attention to adding more monies to my Canadian Tax-Free Saving Account (TFSA). This year, I can put another $6000 into the account for more investment opportunities.
Canada introduced the Tax-Free Savings Accounts (TFSA) in 2009 with a contribution limit of C$5,000 per year. In 2013, that limit was increased to C$5,500 annually and remained at that level through 2018, except in 2015 when the limit was C$10,000. In 2019, the contribution limit was raised to C$6,000, where it remains for 2020 and 2021. The TFSA annual contribution limit is indexed to inflation and rounded to the nearest $500. The total contribution amount from 2009 to 2021 inclusive comes to $75500.
Many Canadians have a Registered Retirement Saving Plan (RRSP) where the deposits are deducted from their taxable income and so taxes are deferred for a later date when the amounts are retrieved for use after retirement and taxed at a supposedly lower rate. On the other hand, after tax monies are placed into TFSA account for investments and you won’t be taxed on any income the investment earns. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
For every person who is a resident of Canada and of 18 years or older, the total contribution “room” for TFSA is $75500. If you have never started on this account or have skipped on your contribution for certain years, you can fill in the gaps at any time. The income earned by investments in your TFSA doesn’t impact your contribution room for current or future years.
There are two catches for the TFSA: First, any withdrawal amount can only be added back to your contribution room at the beginning of the following year. Second, any contribution made to a TFSA beyond the maximum allowable amount is considered an over-contribution. The Canada Revenue Agency (CRA) will charge a penalty of 1% per month on the excess contribution until it is withdrawn.
There are three types of TFSAs that can be offered: a deposit, an annuity contract, and an arrangement in trust. Banks, insurance companies, credit unions, and trust companies can all issue TFSAs. You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year. For most people who want to open a TFSA, they need to contact their financial institution, credit union, or insurance company and provide them with their Social Insurance Number (SIN) and date of birth so they can register a TFSA under the applicant’s name. A self-directed TFSA can be set up if the owner prefers to build and manage the investment portfolio by buying and selling different types of investments such as stocks and bonds.
One does not need to have earned income to contribute to a TFSA. A TFSA account holder can make contributions and withdrawals with the TFSA and determine how funds are invested. If your spouse or common-law partner do not have money to contribute to their own TFSA, you can give the money to them instead. Any earnings from that amount will have nothing to do with you, but the total contributions you each make to your own TFSAs cannot be more than the TFSA contribution room for each person.
TFSA offers Canadians a chance to invest and earn tax-free dollars as savings throughout their lives. There are many other aspects of TFSA that we have not yet covered. There are rules and regulations for the disposition of one’s TFSA upon death for instance. We will explore those and other concerns next time.