Opening a TFSA (Tax-Free Savings Account) is a great way to shield your savings from further taxation as you try to make your money grow. TFSA or Tax-Free Savings Account is a registered savings account or an investment account in which you can amass your savings tax-free. Additionally, if you invest the funds in your TFSA, any capital gain or other investment income in your TFSA is also tax-free.
The TFSA program was started in 2009 to help people set aside a portion of their income and savings which will be tax-free, for their entire lifetime.
Who Can Open a TFSA?
If you are an individual over the age of 18 years and a resident of Canada with a valid Social Insurance Number (SIN), you are eligible to open a Tax-Free Savings Account.
You can open a TFSA with a bank, a credit union, a trust company, or an insurance company. Simply provide your SIN, date of birth (to prove that you are over 18 years of age), or any other supporting documents requested by your issuer, and you can have your TFSA up and running.
Even if you are a non-resident living in Canada, and are over 18 years of age, and have a valid SIN, you can open a TFSA. However, the amount that you contribute to your TFSA will be subject to taxation at 1% for every month.
How Much Can You Add To Your TFSA In 2021?
The Canada Revenue Agency or the CRA has announced the limit on the contribution that you will be able to make to your TFSA in the year 2021.
The annual limit remains unchanged from the previous years and is set at $6000 for this year as well. You can open as many TFSAs as you deem fit, but the contribution that you can make to all your TFSAs combined is capped at $6000.
If your contribution to the Tax-Free Savings Accounts exceeds the upper limit, you will be liable to pay 1% of the highest excess amount for the given month as tax for every month, with the extra amount remaining in your TFSA.
What Is a Contribution Room?
Even though there is an upper limit to how much you can contribute to your TFSA, your contribution room grows each year. Your TFSA contribution room consists of the following three components:
- Your annual TFSA contribution limit.
- Any unused contribution carried forward from the previous years (since 2009)
- Less the withdrawals made by you during the previous year.
If you have made any withdrawals during a given year, they will be added back to your TFSA contribution at the start of the following year. So, if you withdraw any sum of money this year that you’d like to add back, you will have to wait until the following year to do so.
The Bullish Takeaway
Whether you are saving for a rainy day or for your dream vacation, a TFSA allows you to save-up, invest and efficiently grow your money without it being subject to taxation.