Tax-Free Savings Accounts

Tax-Free Savings Accounts may be an alternative to RRSPs for some, but more of a complement to many others.

The Tax-Free Savings Account (TFSA) was introduced by the federal government in 2009 as a way to provide individuals with the flexibility to meet both short and long-term savings goals. Since then, TFSAs have grown in popularity with 42% of Canadians now owning this type of account, namely for the purpose of saving for retirement, according to BlackRock’s Investor Pulse Survey.

Whether or not a TFSA is right for you will largely depend on individual circumstances and may require some assistance from a trusted financial advisor. But learning some of the ins and outs of tax-free savings accounts will certainly go a long way in helping you make an informed decision.

What is the tax advantage of a TFSA?

Subject to contribution limits, income earned on investments in a TFSA is exempt from tax. Further, while the contributions to the TFSA are not tax-deductible, amounts withdrawn from a TFSA are not included in taxable income.

How much can be contributed to a TFSA?

Individuals may start contributing to their TFSA accounts when they turn 18 years of age. Each year contribution room is created regardless of the income of the individual. For 2009 through 2012 the contribution limit was $5,000 per year. For 2013 and 2014 the contribution limit was $5,500 and for 2015 the limit was $10,000. The 2016 limit is being reduced back to the former $5,500 amount and future contribution room will be indexed to inflation subject to rounding to the nearest $500 increment. Unused contribution room may be carried forward indefinitely. As such, individuals who were 18 in 2009 will have cumulative contribution room of $46,500.

What happens to the investments in a TFSA?

While money is invested in a TFSA the income earned on those investments is free of tax, even when withdrawn. This allows an individual the opportunity to save more money now without creating a future tax liability when the money is ultimately withdrawn.

Are there restrictions on withdrawing money from a TFSA?

There are no restrictions on withdrawing money from a TFSA. Amounts may be withdrawn at any time subject to any limitations imposed by the plan provider. Amounts withdrawn are not subject to income tax and any amounts withdrawn will create new TFSA contribution room which may be used in a future taxation year.

What happens upon retirement?

The TFSA has no mandatory termination date. In addition, since income earned and amounts withdrawn from a TFSA are not subject to tax, the TFSA will not cause clawbacks of retirement benefits.

TFSA vs. RRSP