Want to put a little money aside without having to worry about higher taxes? A Tax-Free Savings Account (TFSA) gives you an easy way to save tax-free, while allowing you to withdraw your savings anytime without tax implications. That’s a good deal, isn’t it?
1. A TFSA offers an easy way to save
With a TFSA, people who are 18 or more and who have a Social Insurance Number (SIN) can put money aside in eligible investment vehicles (such as a high-interest savings account or guaranteed investment certificate, and watch those savings grow tax-free throughout their lifetime.
2. It allows you to grow your savings tax-free
The initial amount deposited in a TFSA, and the interest income generated (e.g. investment income and capital gains) is not taxable, even when withdrawn.
3. You can take advantage of unused contribution room from previous years
Yes, but be careful! If your annual contributions go over the limit, you will have to pay tax on the excess amount, which you will have to withdraw from your TFSA. For that reason, it’s essential to know the annual limits since the time of its introduction, in 2009.
4. The money you save can be withdrawn anytime to finance a project or use for an emergency, and you won’t have to pay taxes
If you contribute $3,000 per year to your TFSA for five years, you will have saved $15,000, not to mention the returns. Then, if you need $10,000 for a renovation project or to buy a car, you can withdraw the amount you need tax-free.
In addition, the money you withdraw during one calendar year increases your contribution limit for the following calendar year. You can therefore re-contribute all or a portion of the amounts you withdrew, beginning in the year after your withdrawal. No limit applies to TFSA withdrawals.
5. Amounts invested do not affect your RRSP contribution limit
The amount you save in a TFSA during a year, however much it is, has no impact on the maximum amount that you can contribute to an RRSP, since it is determined based on your income.
Related articles: TFSA or RRSP: Which is right for you?