Let's talk about the TFSA: A flexible account with many different uses
The Tax-Free Savings Account (TFSA) is a savings/investment account that allows Canadians to grow their savings/investments tax-free. The TFSA was introduced in January 2009 as part of the Canadian federal budget as a tool to help and encourage Canadians to save for the future.
What is a TFSA?
A TFSA is a savings/investment account that allows you to grow your money without paying tax on the investment income, whether it be regular interest, dividends or capital gains. This means that if you receive $1,000 in interest from your TFSA this year, you will keep the full $1,000. This is very beneficial as it allows you to keep 100% of the return on your investment and does not affect your personal tax situation each year.
What can you invest in with a TFSA?
The TFSA name is slightly misleading in that it truly is more than just a savings account. Many people don't realize that the TFSA can (and often should) be used to hold investments that are earning taxable investment income each year such as non-registered GICs or mutual funds.
Here are some examples of what type of investments can be held within your TFSA:
- Fixed term deposit investments such as GICs
- Mutual funds
- Individual stocks and ETFs
How much can you contribute?
The yearly TFSA contribution limit was increased in 2023 to $6,500. The contribution limit is the same for everyone and not based on age or income. You are able to have multiple TFSA’s with different financial institutions; however, your total contributions into these different accounts must not exceed your personal contribution limit.
What if you have never contributed to a TFSA before? If you were over 18 in 2009, your lifetime contribution limit is $88,000 if you have never contributed. Similar to the RRSP limit, you can also find information on your contribution room from the person who files your income taxes each year.
How do withdrawals work?
You can withdraw money from your TFSA at any time (assuming the investments are liquid and not locked in a long-term GIC) without paying any taxes on withdrawal. This makes the TFSA a very flexible savings tool that can be used for supplementing retirement income (without affecting Old Age Security), saving for a down payment on a house or as a form of emergency savings. The only caveat is that if you withdraw funds from your TFSA, you lose that contribution room until January 1st of the next year, meaning that if you have maximized your TFSA over the years you won't be able to contribute more until the next year.
The TFSA is a great investment tool that can be used in a variety of ways, from saving up for the future to investing in your retirement. It's important to remember that this account is flexible, so it truly is up to you how you use it. If you are interested in learning more about TFSAs and the investment options you have within them, reach out to us at LPG Wealth at 204-622-7640 or book a free meeting in my calendar below!
Riley Love, MBA, CCS, BSc. Pharm
Partner/Financial Advisor – Love & Persson Group