## What is a tax-free savings account?

Called a TFSA for short, it is a Tax-Free Savings Account put in place by the federal government to allow Canadians to encourage Canadians to save money by allowing them to accumulate savings and to earn interest while not paying income tax on those savings.

You cannot claim the contributions in the TFSA as deductions since you contribute money that has been already taxed. So, the contributions and the earned investments are tax-free.

## Who can have a TFSA?

Anybody who is 18 years old and older, is a Canadian resident and has a valid social insurance number can open a TFSA.

## What is so important about the TFSA contribution room?

Like the RRSP. TFSA has a contribution room limit. If you go over your contribution room, you will have to pay a 1% monthly penalty on the excess amount.

This is the formula used to calculate it:

• Your TFSA dollar limit for that year
• Plus any unused contribution room from previous years
• Plus any withdrawals in the previous year

The annual TFSA dollar limits since 2009 are:

• 2009 to 2012 was \$5,000.
• 2013 and 2014 was \$5,500.
• 2015 was \$10,000.
• 2016 to 2018 was \$5,500.
• 2019 and 2020 was \$6,000.
• 2021 is \$6,000.

For example;

Carl’s had \$6,000 in his TFSA account in 2010. He did not contribute to his TFSA in 2011 but he withdrew \$1,000 in 2011 from his account. His unused contribution room for 2020 will be calculated as follows:

Carl’s unused contribution room at the beginning of 2020 = contribution limits from 2009-2020 – contributions he made so far + withdrawals

Carl’s unused contribution room at the beginning of 2020 = \$69,500 – \$6,000 + \$1,000 = \$64,500

## What types of investments can I use?

Here are the most common types of investments:

• cash
• mutual funds
• securities listed on a designated stock exchange
• GICs (guaranteed investment certificates)
• bonds
• certain shares of small business corporations

## What are the differences between a TFSA and an RRSP?

• Registered Retirement Savings Plans (RRSPs) are designed mainly for retirement savings. TFSAs are very flexible and designed for short-term savings. It is easy to withdraw and repay money in a TFSA.
• RRSP contributions are tax-deductible and withdrawals are added to your income, meaning that they are taxed. TFSA contributions, interest and withdrawals on the other hand, are exempt from tax. An RRSP is a tax-deferred investment vehicle while a TFSA is a tax-free investment vehicle.
• The amount you can contribute to an RRSP is a percentage of your income (around 18%); your personal RRSP contribution limit appears on your annual notice of assessment. Each year since 2009, the federal government determines the dollar limit that represents your maximum contribution to a TFSA in that year, around \$5,000. You can find information about your contribution room in the CRA’s My Account service or by calling the CRA.
• When you turn 71, you must convert your RRSP to a retirement income vehicle. You don’t have to do that with a TFSA.
• You can contribute to your spouses’ RRSP. Only you can contribute to your own TFSA but you can give your spouse money for their TFSA without reducing your own contribution room and without having to account for the earnings in your spouse’s account.
• Check this link to decide which plan is better for you.

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