What is a A Tax-Free Savings Account (TFSA) ?

June 9, 2014 at 11:39 am Leave a comment

imagesA Tax-Free Savings Account (TFSA) is a registered savings plan that allows taxpayers to earn investment income tax-free inside the plan. Contributions to the plan are not tax-deductible and withdrawals of contributions and earnings from the plan are not taxable.

Features And Benefits Of A TFSA

$5,000 in annual contribution room (indexed annually after 2009).
Growth on investments is tax-free.
Funds can be withdrawn at any time, for any reason (subject to any restrictions on a particular investment).
Withdrawals are not taxable.
Amounts withdrawn can be re-contributed in future years.
Unused contribution room can be carried forward indefinitely.
TFSA Contributions

Canadian residents 18 years of age and older can receive $5,000 of TFSA contribution room each year.
The maximum allotted contribution amount will increase annually with inflation, rounded to the nearest $500.
If you do not contribute the maximum amount to your TFSA, your unused contribution room will be carried forward and added to your annual contribution limit for future years.
If you contribute more than the maximum amount in a year, you will be subject to a penalty tax of one percent per month on the over contribution.
Contributions to a TFSA are made with after-tax dollars and cannot be deducted from your income for the year. However, interest, dividends and capital gains earned within the account grow tax-free and you will not pay tax on earnings when you make a withdrawal.
TFSA contributions can be made in addition to RRSP contributions; your TFSA contribution room is not affected by contributions to an RRSP and your RRSP contribution room is not affected by contributions to a TFSA.
Eligible Investments

You may hold many of the same investments in a TFSA that you hold within your RRSP, including:

Cash
Annuities
Mutual funds
Guaranteed investment certificates (GICs)
Segregated funds
Stocks and bonds
Withdrawals From A TFSA

There are no restrictions on withdrawals from a TFSA and you will not be taxed on amounts you withdraw from your account (some restrictions may apply based on the investment type).
You can re-contribute the amounts you withdraw from your TFSA in future years without reducing your future contribution room.
The amount withdrawn will be added back to your contribution room in the next year.
TFSA withdrawals do not have to be added to your income and, as a result, do not affect any federal income-tested benefits.

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