A Beginners Guide to The TFSA

The Tax-Free Savings Account (TFSA) is one of the most common investment vehicles today. Even though the TFSA is available to most Canadians, we aren’t using them to their fullest potential. Furthermore, how they work is frequently misunderstand.

In this week’s post we will be answering some of the most frequent TFSA questions we get.

Who Can Open a TFSA?

Anyone that is 18 years of age, or older, and has a valid Social Insurance Number (SIN) can open a TFSA. This even includes people who are considered non-residents in Canada. For more information on non-resident TFSA ownership Click Here.

How Much Can I Contribute?

The amount of contribution room that a person has is dependent on their age. Contribution room starts accumulating in the year you turn 18. For example, If you turned 18 in 2016, you would have $22,500 of contribution room.

Below is a table showing how much contribution room you have based on your year of birth.

A great feature of a TFSA is the contribution room carry-forward. Similar to the RRSP, when annual contributions are skipped or only partially utilized, the unused room is carried forward for use in future calendar years.

However, unlike an RRSP, TFSA contribution room is not based on income. Rather, everyone is entitled to the same contribution amount each year.

Every January 1, contribution room increases. That means that if you are over 18, on January 1, 2020 you will have an additional $6,000 of contribution room.

Can I Re-contribute After I Withdraw Money?

This is the part that can be a little trickier. The short answer is yes. Any funds that are withdrawn can be re-contributed. However, generally funds that are withdrawn can only be re-contributed in the following calendar year. So if you withdraw $10,000 in 2019, those funds can only be re-contributed on January 1, 2020 or thereafter.

However, if you have unused contribution room from the past, new contributions can still be made. Lets look at an example.

Bill was born in 1980, this means that he is eligible for the max contribution room of $63,500 in 2019. Bill maxed out his TFSAs every year until and including 2017 (i.e., he didn’t contribute in 2018-19), for a total of $52,000.

This means that Bill has unused contribution room of $11,500 currently. Let’s assume that Bill withdraws $15,000 right now. This means that in 2019 he could still contribute $11,500 (unused contribution room) but not the $15,000 he withdrew.

If Bill doesn’t contribute anything for the remainder of 2019 he will have $32,500 of contribution room carry forward available as of January 1, 2020. This is calculated as follows: $15,000 (2019 withdrawal amount) + $11,500 (unused contribution room prior to 2020) + $6,000 (new 2020 contribution room).

If you have never used a TFSA, figuring out your contribution room is simple. However, for others who make multiple contributions and withdrawals it can be a little trickier.

For those that make multiple transactions you can find out how much contribution room you have by looking at your tax return or by logging onto your CRA profile.

What Can I Have in my TFSA?

The name ‘Tax-Free Savings Account’ is a little misleading. In reality, a more accurate name would be Tax-Free Investment Account.

Within A TFSA you can hold cash or any investment product (Daily interest savings accounts, Mutual Funds, Stocks, Bonds, ETFs, and pretty much all other investments you would hold inside a RRSP).

Note: before you go and start investing, you should sit down with your investment advisor and see what your strategic asset allocation should be. Doing this with a competent professional will ensure you are taking on the right amount of risk, purchasing the right investment products, and holding them in the appropriate accounts.

Are There Any Tax Consequences?

No. This is one the most attractive features of a TFSA. Since all contributions are made with post-tax dollars, all withdrawals are completely Tax-Free (hence the name). Funds inside a TFSA are great for emergencies because any withdrawal, no matter how big, has no baring on your taxable situation.

What Happens to a TFSA When You Die?

Anything held inside a TFSA is transferred to the beneficiaries or your estate without any income tax ramification. If beneficiaries are designated, the funds in the TFSA can bypass probate.

If you have any other questions about TFSAs or just about your financial situation, leave a comment below! Alternatively, if you want to remain anonymous fill out the Personal Advice Form and we will answer your question as soon as possible. Either way, we want to hear from you!

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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy