ADVISOR
A TFSA is a registered savings account that allows you to invest your money tax-free. The TFSA is a tax-advantaged investment plan designed to motivate Canadians to invest in their future. With the TFSA, you have the freedom to deposit cash or explore a multitude of investment options including stocks, bonds, and GICs. The best part? In a TFSA, you can enjoy tax-free interest, dividends, and capital gains on your investments, both while they grow and when you withdraw them. So why wait? Start maximizing your savings potential with the TFSA today.
You can open a TFSA at any financial institution in Canada, but at Insurance Wealth Infinite Banking, our advisors use the TFSA as an investment rather than a savings account. This means, we recommend funds that are well-managed and historically perform better than conservative fixed-income funds. We assess your investment risk profile, your investment goals and timeline and build a diverdified portfolio that will bring tax-free gains. You can contribute up to a certain amount each year. The contribution limit for 2023 is $6,500, and any unused contribution room can be carried forward to future years. If you first opened a Tax-Free Savings Account in 2009, your contribution room would be $88,000.
If you over-contributed, you will have to pay a penalty of 1% per month on the amount you over-contributed (not the whole account value). This is the baseline penalty, but things like the time of the year you contributed and the total excess amount can affect how much you pay in penalties.
For example, say you open an account in February and immediately contribute the maximum of $6,500. However, say you then get a $2,000 bonus from your job in October (congrats!) and you decide to put that in your TFSA, too.
Problem is, you’ve now put in $8,500, which is an overcontribution of $2,000. If you don’t withdraw any money this year, you have to pay penalties. So the math would look like the following:
$2,000 x 1% x 3 months = $60.If you had taken it out as soon as you realized, say in November, you would pay a tax of:
$2,000 x 1% x 1 month = $20.
The big difference between a TFSA and an RRSP are the taxes and flexibility. You don’t pay taxes on withdrawals from a TFSA but you do with an RRSP (or when it’s converted to an RRIF).
You also don’t get the tax deduction for TFSA contributions (as you would for an RRSP). Essentially, contributions to your RRSP are deducted from your taxable income that year. For example, if you make $50,000 per year pre-tax and contribute $10,000 to your RRSP, your income for that year will be taxed as if you made $40,000. This could mean a bigger tax refund (or that you owe less money in taxes, if it swings that way).
However, the RRSP is way less flexible than a TFSA because it’s meant as a retirement savings plan. It’s not in your best interest to make withdrawals, since they will be subject to a withholding tax. The one exception is that the RRSP can be used with the Home Buyers’ Plan, wherein you can withdraw $35,000 from your RRSP to use toward the purchase of your first home.
Any Canadian citizen or resident who is at least 18 years old and has a valid social insurance number can open a TFSA account. (You must be the age of majority or an adult in your province to open one.)
If you become a non-resident of Canada, you can keep your TFSA and won’t be taxed in Canada on any earnings in the account or on withdrawals from it. However, if you contribute to it while you are a non-resident, you will be penalized with a 1% tax for each month the contribution stays in your account. Plus, you may have to pay other taxes. Furthermore, contribution room will not build up while you’re a non-resident.
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