Raggedly Rich

Canadian Finances, Musings, and Art

WTF TFSA?

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…

step into my lair – I mean, classroom

History

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)
2015 $10,000
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!

  1. Open an account based on your intentions (stock market investment, plain old savings account, etc.)
  2. Figure out how much room you have for contributions (use the handy chart above!)
  3. Contribute money and keep track of contributions (unless you want Howlers in the mail)
  4. Save, save, save, and watch that money grow
  5. Withdraw for that dream savings goal
  6. 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.

the cow bank

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. 

Do you have a TFSA? What are you using it for? Or are all of you guys American’s?! 😛

12 Comments

  1. Dear Raggedly,

    I have a TFSA (as does my husband) and we use it to generate a tax free income stream. We are still collecting a “salary” (dividends from my husbands corporation) so haven’t needed to draw on it yet.

    Besos Sarah.

    • Ms. Raggedly Rich

      October 5, 2017 at 6:37 am

      Nice!! Right now I have all my investments in there. I like that it doesn’t tie up my money like an RRSP would, and that it’s a lot more flexible. Thanks for stopping by!

      • When I was younger, I was given advice to “max. out my RRSPs each year”. While the idea of saving was a great idea (and TFSAs didn’t exist then), I now have too much money in my RRSPs and am earning too high a salary so the tax savings are equal to or less than (!) what I received at the time. I know, great situation to be in.

        I’m living off my passive income, something I never thought I would do 20 years ago and am eager to get access to that potential (dividend) income in my RRSPs to live off. I’ve started the slow process of withdrawing small amounts ($15,000 a year) from my RRSPs so that I’m not hit with a huge tax bill someday.

        All the best with your investment goals.

        Besos Sarah.

        • Ms. Raggedly Rich

          October 8, 2017 at 12:33 am

          Eventually I hope to get to a point where I can do the same – my union requires a certain amount of savings off each paycheque, and for now I’ll gladly leave those funds there – but the best case scenario is exactly like yours: having to make sure your RRSP isn’t going to be taxed at a higher income!

  2. American here but I’ll be sharing for my Canadian friends 🙂

  3. I was reading and I thought… how come I’ve never heard of any of these?! Then I remembered you are Canadian harharhar. Slow!

    • Ms. Raggedly Rich

      October 8, 2017 at 12:10 am

      Hehh – I’m pretty sure if I was doing this in the States it would be considered illegal… 😛

  4. I love my TFSA! It’s so much more flexible than an RRSP but with the added tax benefits that you don’t get with non-registered accounts.
    I’m trying to play catch-up with my room but will hopefully have it maxed out soon 🙂

    • Ms. Raggedly Rich

      October 8, 2017 at 12:13 am

      I was recently talking about just that with a coworker – and realized that I might be able to max it out in a year and a bit… Now I realize why they send you all those forms when you contribute to it, I gotta find them and calculate how much I contributed minus dividends and capital gains 😛

      Plus! Ideally I want to be in a HIGHER tax bracket than I am right now, for my retirement income – not a lower one 😛

  5. I love my TFSA, it’s over $70K now. I mainly have blue chips in there and ETFs. I have heard some people have million dollar TFSA’s from buying penny stocks or even weed stocks!

    • Ms. Raggedly Rich

      October 11, 2017 at 9:28 am

      That’s amazing! I don’t know anyone who has that kind of money in a TFSA, but it certainly seems like a great way of utilizing it. Food for thought… 🙂

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