The Tax Free Savings Account (TFSA) was created on January 1, 2009 with the intention of helping Canadians 18 and older to save money. The purpose of the TFSA is to provide Canadians with the opportunity to save money and earn investment income on a tax-free basis. Following is a list of the major benefits of contributing to a TFSA:
- You can contribute to a TFSA at any time after you turn 18, there is no maximum age limit.
- You can withdraw any amount at any time tax-free.
- Withdrawals from your TFSA do not reduce federal income-tested credits such as Old Age Security or GST rebates.
- You can contribute up to a maximum of $6,000 during 2020 and any withdrawals during the year can be added back in the following year on top of the maximum.
- TFSAs side-step attribution rules – a higher income spouse can give money to a lower income spouse to allow them to contribute to a TFSA without any tax consequences.
- You can borrow from your TFSA for other investments.
- TFSAs can be set up as an emergency fund, as many people do not have an emergency fund for unexpected future events (i.e. losing your job, house repairs, etc.). Once an emergency fund has been established, you have the opportunity to use your TFSA for investment opportunities.
- It is a great investment vehicle for inherited money.
- You can hold stocks, bonds and term deposits. Although it is called a “savings account”, it is more an investment account depending on which type of financial institution you hold your TFSA with.
TFSA strategies can vary over the years depending on your individual circumstances. As of 2020 you are eligible to contribute up to a maximum of $69,500 if you have not yet started a TFSA. The amount you can contribute will appear on the Notice of Assessment available to you each year after filing your personal income tax return with the Canada Revenue Agency. Due to the tax avoidance advantages that come from a TFSA, it is very beneficial to start your own and contribute to it on an annual basis. Be certain to keep track of your contributions so that you do not exceed the maximum allowable amount as there are punitive penalties for over-contributing.