Despite the fact that Tax-Free Savings Accounts turn 10-years old in 2019, only 69 per cent of Canadians say they have a TFSA according to BMO’s Annual TFSA Study. This number is actually up from 56 per cent from the previous year which is a 23 per cent improvement, but’s it’s still too low in my opinion since TFSAs are arguably the best things the government has gifted Canadians in some time.
Understandably, not everyone has a ton of money to put aside, but even if you have $100 in savings, it’s worth opening a TFSA just so you can earn some tax-free interest. The other barrier is that TFSAs have some pretty weird rules that can be difficult to understand, Heck, of those surveyed, only 11 per cent knew that the 2019 TFSA contribution limit is $6,000. Let’s take a look at the TFSA basics and how you can use the account to your benefit.
Tax-Free Savings Account Basics
TFSAs can be very confusing. Despite the fact that I’ve been using one since they were introduced and I know the rules inside out, I still second guess myself at times and double check to ensure I’m not breaking any rules. Here’s a quick look at the Tax-Free Savings Account basics:
- You must be a Canadian resident and the age of majority in your province to open a TFSA
- Money you put in your TFSA not tax-deductible
- All investment income you earn is tax-free
- You can invest in a variety of products within your TFSA e.g. stocks, mutual funds, ETFs
- Yearly contribution limits are determined by the government
- Assuming you were the age of majority in 2009, you’ll have a lifetime TFSA contribution limit of $63,500 as of Jan. 1, 2019
- Unused contribution room carries forward
- You can not recontribute money you’ve withdrawn from your TFSA in the same year unless you still have contribution room available.
When looking at the above list, things are pretty straightforward, but there are two points that always seem to need clarification.
Despite the name Tax-Free Savings Account, you can use your TFSA is not just a savings account. It’s a savings vehicle where you can stuff it with investment products such as stocks, ETFs, mutual funds, GICs, etc.
The other point that needs clarification is the withdrawal rules. Let’s say your TFSA is currently maxed out. You withdrew $5,000 in early 2018 and as a result, you can’t make any more contributions in 2018 (not even that $5,000) you took out since it would be considered an over-contribution. However, come 2019, you’d be able to recontribute that $5,000 PLUS the new yearly contribution limit of $6,000 for a total of $11,000.
I know this sounds a bit confusing and the CRA website never has up to date info about how much room you have left so people are constantly making overcontributions and paying tax as a result. You’re better off tracking everything on your own.
What I’m using my TFSA for
I personally am using my TFSA for retirement savings and I’m happy to hear that half of the Canadians in the BMO study are doing the same. Now, you might be wondering why I’m using my TFSA for retirement savings when I could use my RRSP? The answer is, I use both. I maxed out my RRSP pretty early because I had a pension with my previous employer so I focused my savings within my TFSA. Since the investment returns are tax-free, I saw this as an opportunity to maximize my investments.
Although my plan is to not touch my TFSA until I retire, I know that money is there in case of some massive emergency. I do have a separate emergency fund, but the point is, I’m not afraid to dip into my TFSA if I have to. Fortunately, I haven’t had to do so yet.
I realize not everyone has the ability to max out their RRSP and TFSA, but I do believe everyone should open a TFSA just to take advantage of the the tax-free investment income. For example, if you’ve currently only saved enough for your emergency fund or you’re just starting to save, you might as well use your TFSA to park that money.
Tax-Free Savings Accounts are one of the best tools available to you. It doesn’t matter if you have $50 or $50,000, you should open up a TFSA and tax advantage of the tax-free income. Take the time to learn the rules and you’ll reap the benefits.