TSFAs: Your Tax-Free Investment Ally

TFSA

tax-free savings account

intro in Canada in 2009

flexible acc for Canadians 18 yrs old +

can hold various investments: cash, stocks, bonds, mutual funds, ETFs

Key Benefits of TSFAs

1. all earnings within the account are tax free

2. withdrawal funds at any time without penalties 

3. contribute regardless of your income level

4. Unused Contribution room carries forward 

5. TFSA withdrawals don’t affect eligibility for programs like Old Age Security 

TSFA Rules and Limits

Annual contribution limit: $7K in 2024 

Lifetime contribution room (as of 2024): $95,000 for those 18+ in 2009

Overcontribution penalty: 1% per month on excess amounts 

Withdrawals can be re-contributed in the following calendar year 

Investment income and capital gains are tax-free within the accounts

TFSA Tax implications

1. Contributions are made with after tax-dollars 

2. Withdrawals are tax-free 

3. No tax deduction for contributions

RRSP Tax Implications

1. Contributions are tax-deductible 

2. Withdrawals are taxed as income 

3. Tax savings occur at the time of contribution

What is TFSA Ideal for?

1. Short to medium-term savings goals 

2. Emergency funds 

3. Saving for major purchases (e.g. car, home down payment)

4. Supplementing retirement income 

What is RRSP ideal for?

1. Long-term retirement savings 

2. When you expect to be in a lower tax bracket in retirement 

3. Building a large retirement nest egg

Maximizing TSFA Contributions

1. Contribute the yearly max

2. Put tax refunds into your TFSA

3. Invest in different things (diversify)

4. Move investments from non-registered accounts

5. Set up auto contributions to save regularly

How to avoid over contribution Penalties?

1. Track TFSA room on CRA My Account portal

2. Set up bank alerts

3. Leave a small buffer for errors

4. Withdraw extra if you over-contribute

5. File forms if you get a penalty

What are TSFA Investment Strategies?

1. Conservative: savings account, GICs

2. Balanced: bonds + stable stocks

3. Growth: mix of stocks/ETFs

4. Income: dividend stocks or REITs

5. Self-directed: build your own mix

What are common TSFA mistakes to avoid?

1. Only using TFSA as savings

2. Too much trading (seen as business)

3. Forgetting foreign tax on investments

4. Mixing up contribution rules after withdrawals

5. Not naming a beneficiary/successor