TFSA (abbr.): Time is money

Spenders and savers. Old adages tell us there are two kinds of people. So do our financial advisors. As it turns out, those stories we heard as kids about Grandma making soup from wing tips and chicken feet were really about money management. The key lesson our families were teaching us? Save early, save long and maximize whatever you have. Can a TFSA help do that? Perhaps. Spender or saver, here’s what you need to know.

What Is a TFSA?

The acronym TFSA stands for Tax-Free Savings Account. This is a registered savings account that allows maximum contributions set by the Canada Revenue Agency (CRA). The interest earned on the principle is tax-free.

Who Can Qualify?

A Canadian with a valid social insurance number may open a TFSA after his or her eighteenth birthday. Regardless of where your birthday falls on the calendar, you can contribute the full amount for that year.

Why Would I Want One?

The main advantage of a TFSA is sheltering interest income earned from tax. Withdrawals of principle and interest income are not taxable. This means you get to keep every penny your investment earns for you. Early investments mean increased savings in tax avoidance in future years.

How Do I Open a TFSA?

Your credit union, financial institution, trust company or insurance company can issue TFSAs.

How Does a TFSA Differ from an RRSP?

The key difference is that an RRSP contribution generates a tax savings in the year the investment is made (it’s tax-deductible). And although withdrawals of both principle and interest income from RRSPs are taxable, the assumption is you will be at a lower tax rate when you need to withdraw RRSP monies. TFSA contributions are not tax-deductible, but both the contributions and investment earnings are exempt from tax upon withdrawal. An investment advisor can help you with a strategy and the math required to analyze your choices. Remember to check with CRA to determine your maximums. Over contributions are heavily penalized.

How Much Can I Contribute?

The TFSA “contribution room” (a.k.a. the maximum amount you can contribute) is a combination of your TFSA dollar limit for the current year, plus any unused TFSA contribution room in the previous qualifying years. It also takes into account any room created by withdrawals from the TFSA in the previous year, excluding qualifying transfers or withdrawals as a result of an over-contribution. Confusing? A little bit. But here’s a simplified example:

If you celebrated your eighteenth birthday in 2009 or earlier, your maximum contribution including 2015 would be $41,000. That’s based on the TFSA limits that were set for those years:

• $5,000 for years 2009, 2010, 2011 and 2012 ($20,000)
• $5,500 for years 2013 and 2014 ($11,000)
• $10,000 for year 2015 ($10,000)

TFSA or RRSP—Do I Need Both?

Like many of life’s choices, the answer is “it depends.” Your financial advisor can help you sort out what the best combination of investments are based on your goals and financial situation. Whatever you decide, one thing’s for certain: it isn’t how much money you make that determines wealth; it’s how much money you save. That, you can take to the bank.

Did You Know?

The late Honourable Jim Flaherty initiated the Tax Free Savings Account January 1, 2009.

The current TFSA maximum investment as of 2015 (assuming you celebrated your eighteenth birthday on or before 2009) is $41,000.

You do not need to have earned income to contribute to a TFSA.

Over-contributing

At any time in the year, if you contribute more than your allowable TFSA contribution room, you will be considered to be over-contributing to your TFSA and you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.
–TFSA Contributions, Canada Revenue Agency Website