TFSA – Tax Free Savings Account

TFSA – Tax Free Savings Account

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I am a big promoter of Tax Free Savings Accounts ( TFSAs). In Canada anyone with a valid social insurance number ( SIN), who is older than 18 in most provinces and 19 in some can contribute to a TFSA.

The great thing about TFSA is that it doesn’t just have to be a savings account. You can have a self – directed TFSA and can buy shares, bonds, units of mutual funds etc … Remember any income you earn in your TFSA in the form of capital gains, interest income , dividend income is not taxable.

Here are some other important points you need to understand about a TFSA :

  • You can contribute up to a maximum of $5 000 CAD a year
  • You can carry over previous year not contributed amounts to the next year .  So for example, TFSA’s started in 2009, and if you havent contributed anything so far, You would be able to open a TFSA account and contribute $15000 CAD ( $5000 CAD for each year ( 2009, 2010, 2011).
  • If you contribute anything above $ 5000 in a certain year, you would be taxed at 1% on the amount above the $ 5000. So for example if you contributed your full $5000 in 2009 and you contributed $7000 in 2010, you would be taxed 1% on $2000 ( Extra $2000 contributed in 2010 ). 
  • TFSA’s are not revolving. So if you contribute your full $5000 for 2010 in January, and you take out $2000, you cannot contribute that $2000 back for 2010.  At the end of 2010 the amount you contributed for 2010 would be $3000 + any gains you made in that money. This is one thing that I find to be annoying about the TFSA 🙂 . 
  • TFSA accounts can be opened at any of the banks, there is no fee for the TFSA account.
  • For the folks who like to trade in non-Canadian markets, currency conversion will occur each time you make a trade. You can only hold cash in Canadian Currency in your TFSA account. 
  • Even in a self directed account any time you need to make a withdrawal from your account, you need to call the bank ( At least with Scotia , and I assume it will be similar for other banks ). I find this to be annoying as well.
  • Similar to RRSPs your tax returns will have your available TFSA contribution room for each year.

To finish off, some numbers to demonstrate the value of a TFSA:

  • If you are in the tax bracket of someone who makes between $40000 CAD to $80000 CAD
  • And you make a $5000 CAD contribution to TFSA each year for 10 years
  • Lets assume good things, and say you make 10% return each year
  • You would save in taxes $8743CAD on your investment in TFSA
  • Now if you had planned ahead and put your investments in a TFSA , now you have enough money for a fancy vacation or the latest of home theater system.

I hope you open a TFSA and save your money 🙂 !

The government of Canada has a great website with more infomraiton on a TFSA : http://www.tfsa.gc.ca/index.html

You can find a TFSA calculator here : http://www.tfsa.gc.ca/cal-eng.html

    2 thoughts on “TFSA – Tax Free Savings Account

    1. Hey Gaya,

      These blogs are great! Really insightful! One thing I'll add is, with TFSAs with ING Direct, you don't have to call to make transactions. Since ING is only online banking in Canada, you can transfer funds online rather than calling in.

      Linda Nguyen

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