TFSA Primer and Checklist 2024
What is a TFSA?
Think of a Tax-Free Savings Account (TFSA) as a financial basket where you can place investments like stocks, bonds, ETFs, GICs, or cash. It’s not just for saving; it’s a powerful tool to grow your money tax-free.
Why Invest in a TFSA?
Unlike traditional savings accounts with minimal interest, TFSAs let your investments grow tax-free. Whether your money earns dividends, interest, or capital gains, you won’t pay taxes when you withdraw it.
Who Can Open a TFSA?
Any Canadian aged 18 or older with a valid Social Insurance Number (SIN) can open a TFSA.
How Does a TFSA Work?
Deposit funds into your TFSA and watch them grow through investments. Withdrawals are tax-free, and the amount you withdraw gets added back to your contribution room in the next calendar year.
Contribution Limits:
The annual limit for 2024 is $7,000. Your total contribution room includes unused room from previous years and withdrawals from the prior year. Lifetime contribution room since 2009 can total up to $95,000 for eligible individuals.
Avoid Over-Contributing:
Exceeding your contribution limit triggers a penalty of 1% per month on the excess amount until it’s removed.
Flexibility of Withdrawals:
Unlike RRSPs, you can withdraw funds anytime without penalties. However, you can’t redeposit withdrawn funds in the same year without exceeding your contribution limit.
Investment Options:
Your TFSA can hold a range of investments: stocks, bonds, GICs, ETFs, or even cash. Choose based on your goals, risk tolerance, and when you need the money.
Taxes and Foreign Investments:
While most gains are tax-free, dividends from U.S. stocks are subject to a 15% withholding tax. Non-residents of Canada may face additional taxes on contributions.
Opening a TFSA:
Visit a bank, credit union, or financial institution with your SIN and date of birth. The process is quick and easy.
Transferring TFSAs:
You can transfer a TFSA between institutions without tax consequences, but check for transfer fees. Choose between transferring as cash or keeping your current investments.
Using a TFSA for Goals:
TFSAs can be used for retirement savings, emergency funds, or big purchases like vacations or a car. Match your strategy to your timeline and risk tolerance.
TFSAs vs. RRSPs:
TFSAs are great for shorter-term goals or if you earn less than $50,000 per year. RRSPs offer immediate tax deductions but are more restrictive on withdrawals.
Managing Multiple TFSAs:
You can have multiple TFSAs, but your total contribution room remains the same. Keep track of all contributions to avoid penalties.
Beneficiaries and Successors:
You can name a spouse or common-law partner as a successor holder, allowing them to take over the account tax-free. Other beneficiaries inherit the funds but may face taxes on future growth.
Limitations of a TFSA:
You can’t day-trade or use TFSAs for frequent speculative trading without risking additional taxes. Contributions are not tax-deductible, and accounts cannot be joint.
Death of a TFSA Holder:
Successor holders (spouses or partners) take over the account tax-free. Other beneficiaries receive the funds, but future gains may be taxable.
TFSA as Loan Collateral:
Some institutions allow TFSAs to be used as collateral for loans, but withdrawals may be restricted until the loan is repaid.
Common Questions:
Can you lose money in a TFSA? Yes, if your investments lose value.
Should you max out a TFSA? Only if you have other financial needs (like an emergency fund) covered.
Next Steps After TFSAs:
Once your TFSA and RRSP are funded, consider diversifying with other investments, such as a non-registered account or saving for your children’s education with an RESP.
This blog post is intended to provide general information only and should not be construed as tax advice or opinions. Always consult a qualified accountant before making any decisions regarding your tax situation.
