The 5 Minute Guide To Your Tax-Free Savings Account

November 22, 2012 at 12:17 pm Leave a comment

Stashing away some extra cash for a rainy day is easier thanks to your Tax-Free Savings Account (TFSA). If you haven’t opened a TFSA yet, here’s how to take advantage of this savvy way to save big and pay no tax on earned income.

What is a TFSA? Who can contribute?

A TFSA is a registered account that allows Canadian residents to earn investment income tax-free. The contribution rules are simple — you must be a Canadian resident, have a Social Insurance Number (SIN), and be at least 18 years old.

How much can you contribute?

Since 2009 you could contribute up to $5,000 of your after-tax income to your TFSA. Starting this year, the annual contribution limit will be indexed to the inflation rate and rounded to the nearest $500. Assuming an inflation rate of 2% for this year, the limit remains at $5,000 for 2010. Don’t worry if you can’t muster the maximum amount this year, all unused room can be carried forward to future years. if you don’t have a TFSA you can contribute up to $25,000  in 2013.

Contributing even a few dollars to a TFSA every year can add up. For example, investing $1,000 annually at 5% interest saves you from paying around $680 in income tax over 10 years. Unlike a Registered Retirement Savings Plan (RRSP), contributions made to a TFSA can not be deducted from your income to reduce taxes

How do you make withdrawals?

Your TFSA contributions and investment returns are always accessible, so you can withdraw the money at any time without paying a penalty or getting taxed. If you need a new roof over your head or suddenly have a car repair, then you can use the money in your TFSA with no questions asked. And any money withdrawn from your TFSA can be replaced at a later date — you don’t lose the contribute space if you use the money.

How do you open a TFSA?

You can set up a TFSA at your favourite bank, credit union, or  financial advisors- me. Don’t forget with  we will shop all institutions to fine  the best investments– many offer competitive rates on high interest savings accounts and are just a click away. If you like the offerings at several banks, you can open more than one TFSA. Just be sure that your total contribution amount does not exceed your TFSA room for a given year.

What can you invest in?

Like your RRSP, your TFSA allows for many types of investments, including  segregated funds, stocks, bonds, mutual funds, GICs, and cash. If you want to use your TFSA like an emergency fund and have the flexibility to withdraw from it at any time, then you can even keep your cash in a registered high interest savings account.

Does a TFSA impact other income-tested programs?

No. Neither the income earned in your TFSA nor withdrawals from it affect your eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security, or the Guaranteed Income Supplement benefit. See the Government of Canada Tax-Free Savings Account website for more information.


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