Tax Free Savings Account (TFSA)
January 17, 2009
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In Chapter 16 I talk about the new Tax Free Savings Account which was introduced in Canada as of January 1, 2009.
As of January 1, 2009, The Government of Canada has introduced the Tax-Free Savings Account, otherwise known as the TFSA. This is a new type of savings vehicle which will help individuals who contribute to the TFSA grow their savings tax-free throughout the lifetime of the account
These new TFSAs allow the account holder to invest up to $5,000 each year into the account and earn interest on it without having to pay tax.
So how does a TFSA work? Well, each year, Canadians 18 years and older can contribute up to $5,000 into the TFSA. Your contribution into the account is not tax deductable, meaning you will have to pay income tax on your contributions. The great thing about the TFSA is that any money created while in the TFSA, whether it is investment income or capital gains are exempt from tax. Yes you heard me; any money that you make within the TFSA is tax free, but the good news doesn’t stop here!
You can remove money from the TFSA and put it back in whenever you want, and you don’t have to pay taxes on money withdrawn from your account. If you make a withdrawal and later put it back into your account, this will not affect your yearly contribution limit. Additionally, any income earned in the TFSA and withdrawals from the account do not affect your eligibility for federal income benefits and credits.
And speaking of contribution limits, you can carry forward the amount of money you don’t contribute into future years. As an example, in your first year of having the TFSA, let’s say you can only afford to put in $2,000, meaning that you still have $3,000 left to contribute to your TFSA before you reach the contribution limit. You can carry this remaining contribution forward into the future. So let’s say every other year for the next five years you put in the full $5,000, and in the fifth year you can afford to put in an additional $3,000, you can do this, because you are allowed to carry the remaining room in your TFSA
contribution limit forward.
For more information, check out the Canadian Revenue Agency’s TFSA page or contact your local bank.
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Adam Goodman is the author of Following The Goods Financial Management for the Young and Ambitious. Throughout his life, Adam never took ownership of his financial knowledge and no one ever sat down with him to explain what it meant to plan for his financial future. Luckily, while at business school, Adam finally learned how to be smart about financial management and he is here to share what he has learned along his journey with you.
Adam's past experience includes owning and operating his own consulting firm, as well as working as a Consultant with Deloitte & Touche. Adam is currently in a sales and marketing role in the telecom industry.
