What is a Tax-Free Savings Account (TFSA)?
A Tax-Free Savings Account (TFSA) is a type of registered plan. Through a TFSA, you can put your savings into eligible investments and not pay tax on the investment income you earn.
Who is eligible for a TFSA?
The idea behind TFSAs is to make the benefits of tax-free savings available to as many Canadians as possible.
For that reason, TFSAs are available to every Canadian resident who is 18 years of age or older and has a Social Insurance Number (SIN).
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However, at TD, you must have achieved age of majority in order to open a TFSA. So, if you live in British Columbia, Newfoundland and Labrador, Nova Scotia or New Brunswick, then you can’t actually open a TFSA until you are 19, which is the age of majority in those provinces.
However, you will accumulate contribution room from the time you are 18.
How is a TFSA different from an RSP?
An RSP is designed specifically to provide you with income after you retire.
Your contribution limit is based on your income and the contributions you make are tax-deductible, but you do pay tax on the money when you receive it as income.
A TFSA is not designed specifically for retirement, but to help you save money for a wide range of goals.
The amount you can contribute is not based on your income and your contributions are not tax-deductible.
You can withdraw your money any time you want it, and you don’t pay tax on those withdrawals. You also don’t lose contribution room when you make a withdrawal – you can recontribute that amount to your TFSA the following year or any year after that.
How much can I contribute?
From January 2009 to December 2012, you could contribute up to $5,000 a year to your TFSA, 2013 and 2014, up to $5,500 a year and in 2015, up to $10,000.
In 2016, the annual contribution limit has been reduced to $5,500.
What if I can’t contribute the full $5,500?
You can carry forward any amounts not contributed into future years indefinitely.
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So, for example, if you opened a TFSA in 2014 and contributed only $5,000 in that year, in 2016 you could contribute up to $10,500 (the $5,500 limit for 2016, plus the $5,000 you had left over from 2015. If you have never contributed to your TFSA, the cumulative contribution limit in 2016 would be $46,500).
How will I know what my contribution limit is for each year?
Every year, the government will calculate how much TFSA contribution room you have available.
You will be informed of your contribution limit when you receive your T1 Notice of Assessment.
Can I contribute more than my limit in a particular year?
If you contribute more than your contribution limit, you will pay a penalty of 1% per month on the excess amount.
The annual TFSA contribution limit was $5,000 from 2009 to 2012, $5,500 for 2013 and 2014, and $10,000 for 2015. The TFSA contribution limit for 2016 is $5,500.
Annual TFSA contribution limit is subject to change by the federal government. Excess contributions to a TFSA will be subject to a penalty tax of 1% per month based on the highest excess TFSA amount in that month. The penalty will be calculated on a monthly basis until the excess amount is withdrawn.
Can I make spousal contributions to my spouse’s TFSA?
No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RSP.
However, you can give your spouse money, which they can then contribute to their own TFSA. Any income your spouse earns on the money in their TFSA is theirs and will not be attributed back to you.
When can I withdraw my money?
You can withdraw funds from your TFSA any time you want1 – you don’t have to reach a certain age before you withdraw your money.
Do I have to pay income tax on my withdrawals?
No, you don’t have to pay tax on the amounts you withdraw.
Because TFSA withdrawals don’t count as taxable income, they don’t affect Federal income-tested benefits or tax credits you may receive, including the Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit and the Age Credit.
TFSA withdrawals also won’t reduce benefits based on your income level, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits.
What can I spend the money on?
Anything you want.
You could wait until you retire and use it to supplement retirement income you have from pensions, RSPs or other sources, but you can also use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home.
Once I’ve withdrawn my money, is that contribution room lost?
No, you never lose your contribution room – in fact, you can recontribute amounts you have withdrawn.
You have to wait until the next year to recontribute, but you can carry forward the recontribution room indefinitely.
For example, first assume you fully used all your contribution room up prior to 2015. Then say you contributed $10,000 to your TFSA in January 2015.
Then, in the summer of 2015, you withdrew $3,000 to pay for some repairs to your home.
What is a TFSA?
You can’t recontribute that $3,000 in 2015, but, in 2016, it will be added to your contribution room again, meaning you could contribute up to $8,500 in 2016 (the 2016 contribution limit is $5,500).
Are there any restrictions on withdrawals?
You can withdraw funds at anytime, however, some restrictions may apply, depending on the investment options chosen.
Do I have to pay tax on my money?
No, you don’t pay any tax on the investment income you earn in the account, and you don’t pay income tax on the amounts you withdraw.
Are my contributions tax-deductible, like RSP contributions?
No, you can’t deduct contributions to your TFSA from your income as you can with your RSP contributions.Investments
What kind of investments can I hold in my TFSA?
You can hold many of the same investments you hold in your RSP in your TFSA, including mutual funds, GICs, stocks and bonds.
Note: The above information about the Tax-Free Savings Account is based on the information currently available from the Canadian government.
To learn more or to check for updates, visit the TFSA information page on the Canada Revenue Agency website.
For more information about the TFSA and how you can reach your savings goals, call us at 1-866-280-2022.
1Some restrictions may apply, depending on the investments chosen.