All of us save money for some particular reason. It can be for education or a vacation in South East Asia, for buying a house, or for securing our retirement. To choose a savings account that is flexible and gives you maximum benefits is very important. The Tax-Free Savings Account (TFSA) is among the top choices when it comes to saving money.
The TFSA is a registered account in which contributions, interest earned, dividends, and capital gains are not taxed by the Canada Revenue Agency and can be withdrawn tax-free. Anyone who is a Canadian resident and is above 18 years old can have a TFSA.
The TFSA was introduced back in 2009 and you can hold certain investments including mutual funds, bonds, securities, and cash making it more of an investment account. The TFSA is a tax-sheltered plan which means it helps to reduce the payment of taxes significantly, especially if you can generate multifold gains.
The registered account allows you to hold a combination of investments like high-risk equities and low-yield bonds. Further, any interest you gain on these investments is tax-free. If your TFSA portfolio is well balanced, then you also manage to generate long-term returns. This is the ultimate benefit of having a TFSA account as you have to pay taxes on withdrawal from other accounts such as an RRSP.
TFSA is gaining in popularity among Canadians
TFSA’s are extremely flexible. You can withdraw your money from the account anytime you want without having to pay a penalty or a tax. On the other hand, you can only withdraw money from your RRSP account under specific conditions or you can face a penalty as well as tax liabilities. You have to repay the withdrawn amount within 10-15 years in some cases which makes it similar to taking a loan from yourself.
According to Finder.com, TFSA is also a great choice for long term savings as this account does not have an expiration date. You can access your funds in case of an emergency and even after retirement, to delay the withdrawal of money from your RRSP account, in turn delaying to pay taxes on those withdrawals. Further, you can have multiple TFSAs for specific financial goals or desires that you want to fulfill but your contribution room remains the same.
The money that you are allowed to put into your TFSA account is known as the contribution room which is different for every individual. The cumulative contribution room for Canadians with a valid TFSA back in 2009 stands at $69,500. The TFSA contribution limit for 2020 is $6,000.
The unused contribution room in a TFSA unused can be carried forward to the next year. Any withdrawal money is added back to your contribution room at the beginning of the following year which is not possible in the case of RRSPs. For example, if you did not contribute towards your TFSA in 2019, the contribution limit for 2020 will be $12,000. In case you contributed to the TFSA last year, but also withdrew $25,000 in 2019, your total contribution room for 2020 will be $31,000.
The final takeaway
A Boomer and Echo report state that in a TFSA, Canadian equities grow tax-free and foreign dividend-paying stocks are also free of Canadian taxation (with the exception of 15% U.S. withholding tax) which allows investors to take full advantage of their account.
For seniors, any TFSA withdrawal in retirement is not considered as income, therefore not affecting their eligibility for government benefits such as Old Age Security (OAS). We can see why TFSA gains an upper hand in comparison with other non-registered accounts.
TFSA is perfect for those who are in a lower tax bracket or don’t have much to invest. People who are earning enough to run their household but are struggling to allocate some money for savings, investing in a TFSA makes perfect sense. As you are not in a higher tax bracket, you don’t have to pay a lot of tax but you can still benefit from whatever little that you save in your TFSA account.
TFSAs are beneficial, flexible, and help us save a lot on taxes. They are like the one-size-fits-all of investing. Nevertheless, investing and saving money depends entirely on an individual’s preferences and choices and TFSA is one of the phenomenal options to save money efficiently.