Introduced in 2009, the Tax-Free Savings Account (TFSA) can be a powerful tool in your investment arsenal. The TFSA provides new avenues for investment growth without the need to spend effort on tax planning like on other investment income. The annual contribution limit for a TFSA has fluctuated each year.
The 2019 TFSA Contribution Limit
The TSFA contribution limit for 2019 is $6,000. You can contribute any unused amounts from previous years as well, and you can contribute to your spouse’s TFSA, provided that total contributions to their TFSA doesn’t exceed the limit.
How TFSA Contributions Work
Contributions and investment earnings have no income impact or tax load when they are withdrawn. The TFSA is a straightforward, truly tax-free product.
You must meet residency requirements in order to open and actively contribute to a TFSA, though these include generous residency-tie conditions. However, if you change residency to another country or lose these residency ties after establishing your TFSA, contributions and earnings can stay in the program until you withdraw (though no new activity is allowed).
Income Tax and Benefits Impact
“Unlike a retirement savings plan (RSP), a TFSA does not reduce your taxable income when a contribution is made, but it does provide significant tax benefits for investors,” says Wes Beharrell, certified financial planner and division director with Investors Group Financial Services in London, Ontario.
“Your deposits to a TFSA are after-tax dollars, but once in a TFSA, any withdrawals, capital gains, dividends and interest remain tax-free.”
You can make withdrawals from the TFSA at any time, and such withdrawals don’t affect your income level when you apply for income support programs such as Old Age Security, Guaranteed Income Supplement or Employment Insurance benefits. Similarly, tax benefits based on income, such as the Canada Child Benefit and GST/HST credit, are not affected by TFSA withdrawals.
Withdrawal Rules
While you may withdraw money at any time with no tax penalty, your total contributions for the year do not account for withdrawals.
This point confuses many Canadians. For example, say you deposit the maximum of $5,500 in June 2016, then withdraw $2,000 for a vacation in September, and you repay $1,000 in November. Your 2016 contribution is considered $6,500, and the $1,000 overpayment is taxable.
Unused contributions carry over, so skip the repayment in November, and the remaining allowable contribution from 2016 becomes available again in January 2017 for use in any future calendar year.
Investment Vehicles
Unlike typical savings accounts, you’re not tied to a fixed rate of return. The range of investments allowed for TFSAs is similar to those for RSPs and other investment plans. You can transfer investments you already own into your TFSA, as long as these qualify for use in TFSAs.
While you must open a TFSA through a bank or financial institution, self-directing account activity after that is permitted. You can transfer an investment from your RSP to your TFSA, such as a mutual fund, stock or bond issue. However, the transfer from your RSP is considered a withdrawal, and, as such, is liable for deferred tax.
References & Resources
- Wes Beharrell CFP, Division Director, Investors Group, London, ON.
- Canada Revenue Agency: The Tax-Free Savings Account