In the spirit of making last-minute financial plans, here is a bullet list of 12 TFSA considerations for Canadians.
- If you’re 18 years or older, you can contribute $5,500 annually to a high-interest tax-free savings account (which pays more than a traditional bank savings account).
- If you can’t contribute $5,500 in a calendar year, you can carry over unused contributions to future years. However, if you contribute more than $5,500 in a calendar year, you are subject to a 1% penalty tax for every month you were over.
- Any amount withdrawn from a TFSA can be re-contributed in a future year without requiring new contribution room.
- If you’re going to need to make a withdrawal before the end of the year, you can only re-contribute the withdrawn amount in the following calendar year.
- Unlike an RRSP where withdrawn income is added to your taxable income, TFSA withdrawals are tax-free.
- Unlike an RRSP, TFSA income (interest) or withdrawals won’t affect your eligibility for federal benefits such as the Canada Child Tax Benefit, GST Credit, Age Credit, Old Age Security and the Guaranteed Income Supplement.
- You can have multiple TFSA accounts, as long as you don’t exceed the annual $5,500 annual contribution limit.
- Individuals can contribute to a spouse’s TFSA account.
- Unlike RRSPs, TFSAs have no age restrictions, allowing seniors to continue contributing to them even after they reach age 71.
- You can use your money in a TFSA account to purchase higher interest products (eg. GICs, bonds, mortgages, etc) versus having the money sit dormant earning minimal interest.
- Any investment return (capital gains, interest and dividends) earned in a TFSA is never taxed, not even when withdrawn.
- TFSA money can be used for any purpose you wish – from down payments on a home to vacations or financing your child’s college education.
While an RRSP is primarily used for retirement savings, a TFSA offers more liquidity for different financial choices over and above retirement.
You might be surprised to learn that everything you thought you knew about RRSPs and TFSAs isn’t as complicated as it seems. Now might be as good a time as any to seek out an informed opinion from a trusted, licenced advisor.