The introduction of the tax-free savings account (TFSA) in 2009 was one of the most powerful contributions to personal saving and wealth building since the RRSP was created in 1957. This type of account gives those who utilize it not only flexible options to save cash but also tax-incentivized investment options throughout the life of the account.
For those qualified to contribute their savings to a TFSA, which is most people in Canada, we’ll provide all of the information you need in order to understand what exactly it is, who is eligible to contribute, how to open an account, and what the particulars of the account are.
What is a TFSA?
The TFSA is a type of personal retirement account that allows those who are eligible to contribute after-tax money throughout their lifetime. After-tax money is income received in your bank account after all taxes are taken out by your employer. You can contribute directly from your bank account either automatically at regular intervals (with most banks) or manually.
The greatest benefit of the TFSA and the facet that sets it apart from the RRSP is that all money that is deposited into a TFSA and all income earned in the account are tax-free for the life of the account. This includes dividends, interest, and capital gains, which are taxed in a regular brokerage account.
Money can be withdrawn from your TFSA at any time without incurring taxes as well. This means that you can treat the TFSA as a “rainy day” fund because any money you withdraw can be re-deposited, though there are some restrictions to this we’ll get into shortly.
What Types Of Investments Are Available With TFSA Accounts?
Not only does a TFSA offer generous flexibility with regards to withdrawing money but it also provides access to several different types of accounts depending on your investment style.
Most banks will cater to the vast majority of investors in Canada who prefer to let their money sit and grow rather than trade in and out of assets depending on their preference. Numerous mutual funds and Guaranteed Investment Certificates (GICs) are available to choose from.
However, for those interested in a bit more of a hands-on approach, several brokerage firms will offer self-directed TFSA accounts where you can invest in stocks, ETFs, and US stocks as you see fit.
Be sure to pay close attention to the details of the self-directed account because there may be minimum account sizes and other fees to take into consideration before going that route.
There are many investment firms out there, so look into many of them to find out which one offers the right kind of assets for you to invest in. Just remember that tax-free growth can be a huge benefit for those willing to take a bit of risk.
If there are a few stocks you might be interested in buying and holding for a long period of time, a combination of stock price growth and potential dividends can lead to big numbers over the course of 40 plus years of investing.
Who Can Invest in a TFSA?
The TFSA is available to Canadian residents aged 18 years or older who have a valid Social Insurance Number (SIN). It is as simple as that!
Does A TFSA Have Any Downsides?
This is a perfectly valid question, the answer to which is sort of. Imagine a world where you can simply invest all your money, whether you make $1,000 per month or $100,000 per month, and the returns on that money were completely tax-free. This would create all sorts of problems!
When the TFSA was created, a limit was also implemented that changes from one year to the next. For 2021, the contribution limit, or contribution room, is $6,000. However, any amount of the contribution room you don’t use carries over to the next year.
For instance, if you only contributed $5,000 in 2020 when the contribution room was $6,000, you now have $7,000 of contribution room for 2021. This is also retroactive.
This means that, if you were older than 18 in 2009 when the TFSA was introduced and you haven’t opened an account until this year, your contribution limit for 2021 is the total of all contribution limits since the TFSA was created.
While contributions to the TFSA won’t reduce the taxes you owe for 2021, you will still be able to catch up with your retirements investing with each passing year.
How Can I Open a TFSA?
If are eligible to open a TFSA (mentioned above), all you have to do is go to the website of your bank, investment firm, or credit union and click a few buttons to get the process started. Once they confirm that you’re eligible, they’ll create your account and you can start right away!
Some institutions provide beneficial guidance on how to start investing your money, so one of the most important decisions you can make is to find a bank that will help guide you if you’re unsure how to start investing your money.
You can also find investment professionals who will help you through the process or even open an account on your behalf. While opening the account is simple, knowing where to invest your money is another conversation, though one that is just as important.
The TFSA is an extremely beneficial method of saving for a rainy-day fund or, especially, retirement. It is eligible for all Canadian residents over the age of 18 with a valid SIN. The flexibility of the accounts and the tax-free growth make this a potent method of saving for almost anyone able to take advantage of it.