A tax-free savings account (TFSA) lets you save up to $5,500 per year for any purpose without paying taxes on the investment growth. Whether you’ll need those savings in a few years or well into the future, a TFSA is a smart way to save your money and see your savings grow tax-free.
You should consider a TFSA if you want to save money for an emergency fund (or any other purpose) and see your savings grow without paying taxes on the investment income, you’re looking for a tax-efficient way to increase your retirement savings beyond what’s in your RRSP, you have money in a regular savings account and don’t want to continue paying taxes on the interest, you have already contributed as much as you’re allowed to your RRSP
How a TFSA works
Canadians aged 18 and older can save up to $5,500 (as well as any unused contribution room from previous years) every year in a tax-free savings account.
A tax-free savings account doesn’t have to be a savings account at a bank. It can also contain a variety of investments, such as mutual funds or guaranteed interest certificates (GICs).
Your contributions will not be deductible for income tax purposes but investment income you earn, including capital gains, will not be taxed, even when withdrawn.
You can carry forward unused contribution room to future years.
Subject to the terms of your investments, you can withdraw money at any time for any purpose.
The amount you withdraw is added to your contribution room in the next year, in addition to the annual maximum. If you’ve carried unused contribution room forward from previous years, you may be able to add more than the annual maximum.
Neither income earned nor withdrawals will affect your eligibility for federal income-tested benefits and credits, such as Old Age Security.
TFSA assets can be transferred directly to your spouse when you die without affecting your spouse’s contribution room.
You can name a beneficiary on almost all TFSA accounts, which helps you avoid the cost and delays associated with probate and estate settlement.
How much can you contribute to a TFSA?
You may contribute up to $5,500 for this year. If you’re just starting a TFSA, you can also contribute for past years, assuming you lived in Canada and were at least 18 in those years.
What happens if I don’t contribute the full amount each year?
You can carry forward any unused contribution room from previous years. There is no limit on how much contribution room you can build up or on the length of time you can build it up.
Example: If you didn’t contribute to your tax-free savings account between 2009 and 2014 and you were at least 18 years old in 2009, you could contribute $57,500 in 2018.
What happens if I contribute more than my limit in a year?
The Canada Revenue Agency (CRA) will assess a penalty of one per cent per month on the amount over your total contribution room for your tax-free savings account.
How will I know if I over-contribute?
The CRA will confirm unused room and limits each year. This information is available through “My Account” on the Canada Revenue Agency website.
Making a TFSA withdrawal
Subject to your investment terms, you can take money out of your tax-free savings account any time and for any purpose. There are no restrictions on how much you can withdraw.
Do I pay any income tax on withdrawals?
No, withdrawals are tax-free.
Do withdrawals affect my taxable income?
No, since withdrawals are not taxable, you don’t have to report them as income.
What happens if I withdraw funds and later decide to put them back in the account?
You can put money you withdraw back into your account in the same year, as long as you have available contribution room. If you don’t have room, wait and put the money back in the next year. If you contribute more than your limit you will be subject to a one per cent penalty for each month you are over the limit.
Make a TFSA a key part of your savings plan
Whatever you want to save for, your retirement, your first home, an emergency fund, a dream vacation or even a wedding, a TFSA can help you reach your goal. An advisor can show you how a TFSA can fit into your total financial picture, and can help you choose your investments to make the most of the benefits offered by this powerful savings vehicle.
Talk to your advisor or find an advisor near you to learn how a tax-free savings account fits into Money for Life, Sun Life Financial’s customized approach to your financial and retirement planning.
Sponsored by Shannon Hood Financial Services Inc.