TFSA stands for Tax-Free Savings Account, and they’re a saving resource for Canadians. But WTF are they and how do they work? If you try looking at the Government of Canada website, it feels a lot like the Internet equivalent of Professor Binn’s History of Magic class.
You might have no idea what it is, or have a little bit of an idea (like me) – or you might know everything there is to know about them (in which case, please let me know if I got something wrong).
Now that I’m seriously looking into, and saving for, a home, I’m starting to think about all that dough I have in my TFSA, and how it all works. Follow me on this self-learning, maybe-educational journey about the TFSA…
In 2009, Prime Minister Stephen Harper introduced the Tax-Free Savings Account for Canadians. I’m not here to debate the merits or pitfalls of the introduction of the TFSA, and trust me, there are a lot of opinions out there about that, as well as who it benefits, and whether or not it’ll royally f’ up future country budget due to unrealized un-taxed income… or something.
Like I said, not here to debate. Just here to illuminate.
For every year, there is a limit to how much you can contribute to your TFSA. This limit is in addition to the limit in previous years. I’ll explain after this nice, easily digestible chart that shows the limits since 2009:
|2009 – 12||$5,000/y ($20,000 total)|
|2013 to 14||$5,500/y ($11,000 total)|
|2016 to 17||$5,500/y ($11,000 total)|
( the government website didn’t even bother putting these figures into a chart. Soooo Binn’s of them )
So if you turned 18 in 2009, you can contribute up to $52,000 to your TFSA, currently. Adjust as necessary for the year you turned 18 – if you were 18 in 2015, you can contribute up to $21,000.
You must have been 18, and have been a resident of Canada to qualify for the contribution limit of that year. You also need a valid SIN.
What’s It For, Exactly?
The term ‘savings vehicle’ gets thrown around a lot. I’m sure there’s other terms that get thrown around a lot too, but for my purposes, I’m going to ignore the political debate and talk about how YOU can use it.
The TFSA gives you an alternative to an RRSP (registered retirement savings plan). If you’re like me, and haven’t really ever had an income, or been offered employer-matched RRSP contributions, you might not have an RRSP. The benefit of a TFSA over an RRSP, is that you can withdraw the money at any time, without penalty.
That means if you have a substantial goal you’re saving for (say, buying a house in 1-5 years), you can safely put that money in a TFSA where it can earn tax-free interest (via stocks, bonds, GIC’s, etc), and then withdraw it without penalty. Or if you’re saving for a car, or a renovation, or a wedding, etc. – it’s basically a savings account where your income off dividends and capital gains isn’t taxed.
IMPORTANT NOTE: Once you withdraw that money, you can’t put it back in unless you still have contribution room. If you’re maxed out at $52,000 and you withdraw $1,000 – Don’t Put It Back In. You have to wait until the next calendar year until you can put that $1,000 back, in ADDITION to whatever the contribution limit is that year. If it happens to be $5,000 then you’ll be able to contribute $6,000. If you try to do it right away, you’ll get whacked with an envelope of doom (that has a penalty charge in it).
How Do I Get One?
To open a TFSA, you have have a valid SIN, and be over the age of 18 – and be a resident of Canada. A lot of different investing platforms (banks, stock brokers) offer TFSA’s, so if you want to open one, take a look at what you already have and what they offer. Then compare it to the other things that are out there, and what they offer.
There’s going to be a pile of paperwork, and likely will be each time you contribute.
If you have multiple TFSA’s, remember that they’re linked with your SIN, and that it’s your responsibility to make sure that you don’t accidentally over contribute. Over contribution is smacked with a penalty (1% interest on the highest amount of excess, per month – there’s a lot of math involved, which I understand, but cannot explain, but which you can view in detail on the government website here).
How Do I Use It?
Just like a normal savings account, in most cases. Your bank might offer slightly better interest rates in a TFSA, or the option to get bonds, GIC’s and stocks. Or, your broker might offer an account for buying stocks, index funds, and ETF’s.
Any money you make off your investments won’t be taxed, and it also won’t count against future contribution limits. If you make $300 off you $52,000, that won’t subtract $300 from the following years contribution limit.
Decided you want to open one? Here’s a 6-step guide!
- Open an account based on your intentions (stock market investment, plain old savings account, etc.)
- Figure out how much room you have for contributions (use the handy chart above!)
- Contribute money and keep track of contributions (unless you want Howlers in the mail)
- Save, save, save, and watch that money grow
- Withdraw for that dream savings goal
- but DON’T re-contribute that amount until the FOLLOWING year (unless you want another Howler)
Now, clearly I’m not a finance professional, nor have I any credentials beyond the be-smart school of Mum & Dad. Figure out what your short- and long-term goals are, figure out if a TFSA is going to help you get there, and if it is, do some research and figure out where / what kind of TFSA you want to open up.
In my personal, non-professional opinion, a TFSA is a great way to save for something that’s not (but could be) retirement.
If anything else, once your RRSP is all filled up, and your other investments have been topped up too, a TFSA is likely a better place to stick your money than the sad old low-interest savings account, or taxable investment account.