How does a TFSA work?
You probably already have a savings account, where you squirrel away extra cash. Why do you need another one?
Truth be told, the term “Tax Free Savings Account” is actually a bit of a misnomer. Your TFSA can do so much more than store your cash. It’s best to think of your TFSA as a giant bucket where you can place all sorts of investments, including stocks, bonds and guaranteed investment certificates (GICs).
The money you contribute will accrue interest, just like it would with a regular savings account. However, everything you gain will be exempt from taxation, even when you go to withdraw it. That includes any dividends or gains on your investments.
Sounds great, right?
A few exceptions will be taxable, like dividends on foreign investments. And one big caveat is that you should never use your TFSA for day trading. If you do so many transactions in your TFSA that you start looking like a business, the Canada Revenue Agency could club you with a 50% tax on all those earnings.
How much can I invest inside a TFSA?
The beauty of a TFSA is that there’s no minimum investment. You can put in $5; you can put in $5,000. You can even set up an automated payment schedule, taking a few bucks off every paycheque.
While you may be tempted to dump all your money into TFSAs, the Government of Canada limits how much you can contribute each year. The current limit is $6,000, a total that accounts for any number of TFSAs you might have. Any gains or interest you earn in a TFSA don’t count against this contribution room.
To invest any funds over $6,000, consider opening an account with an automated investing service. An example is Wealthsimple, which will automatically adjust your portfolio to give you some protection from market turbulence.
Make sure you don’t get carried away with your TFSA. Contributions over the $6,000 limit will be dinged a 1% penalty per month on the excess until that money is withdrawn.
But here’s where it gets fun: If you don’t make the full $6,000 contribution to your TFSA in a given calendar year, your contribution limit rolls over to the next year. And it will continue rolling over, expanding your contribution limit year after year.
So if you’re low on cash now but come into a windfall down the line, you’ll be able to make up for lost time.
And if you’ve never had a TFSA before, you might have a colossal amount of room built up by now. In 2020, you could dump up to $69,500 into a TFSA if you were a citizen and 18 or older by the time the program started back in 2009. Congratulations, ’80s kids.
When can I withdraw money from my TFSA?
What draws most people to a TFSA over an RRSP or other savings vehicle is that your money can easily be freed up in case of an emergency — or if you’re just saving for a round-the-world vacation or other big purchase.
You can move money from your TFSA into a chequing account at any time, for any reason and without penalty. Just keep in mind that some banks, like RBC, implement a 24-hour waiting period before you can actually use the money.
Note that any money you take out cannot be returned in the same year. If you move $600 out in June and put it back in by August, that’s considered a new contribution and $600 comes off your limit. You’ll have to wait a year to get that contribution room back, so be mindful.
What happens to my TFSA if I leave the country?
If you’re planning on moving abroad, you can simply withdraw all of your money from your TFSA without any tax penalty.
If you want to keep your TFSA open, things get a little trickier. You can still keep your TFSA open as a non-resident, but you cannot make any contributions. Any contributions made as a non-resident will be subject to the same tax penalty as an over-contribution: 1% per month, for as long as the money remains in the account.
Can I write off my TFSA contributions?
No, your TFSA contributions are not tax deductible. That includes any administrative fees, interest or money borrowed to contribute to an account.
With a TFSA, your contributions were already subject to tax before going in, so they’ll be tax-free when you go to withdraw them.
How do I get a TFSA?
It’s as easy as going to your bank or credit union and booking an appointment with a financial adviser. However, if you look around, you may be able to take advantage of special signup offers.
For example, opening a TFSA through Tangerine right now will get you a special interest rate of 2.8% for the first five months. Or, if you're ready to invest, MoneyWise readers who open a TFSA through Wealthsimple get their first $10,000 managed for free for a year.
Setting up a TFSA is one of the easiest steps you can take toward building a more financially secure future. It’s an especially good tool for young people getting started with their savings, because it provides the tax-sheltered status of an RRSP but with the flexibility to make withdrawals for all the big purchases still to come.
So go ahead — invest in you.