Tax-Free Savings Account Planning
The team at Walton Financial Group in Barrie, Ontario offers expert investment advice and insight on how to include TFSA’s in your financial plan
A TFSA, or tax-free savings account, is an investment account and – as the name suggests – a tax shelter. A TFSA can hold cash, guaranteed investment certificates, mutual funds, index funds, exchange-traded funds, or other investment products.
Unlike a registered retirement savings plan, which is also an investment account, the TFSA has no associated tax deduction, meaning contributing to it will not help you pay less in taxes right away. However, while RRSP withdrawals are taxable, the money you take out of your TFSA is not subject to taxation.
The TFSA is an investment account with a yearly contribution limit. The contribution limit is the maximum figure you’re allowed to add to the account.
Once money goes into a TFSA, gains become off-limits to the Canada Revenue Agency. In other words, whether you’re earning interest, dividends, or other kinds of investment income within the account, you do not have to pay income tax on those earnings. This is true whether you leave the money in the account or withdraw it.
The government sets an annual contribution limit, which is indexed to inflation in $500 increments. The contribution limit applies to all Canadians equally – unlike RRSP limits, it is not related to your earnings. In 2024, the annual limit is $7,000.
Contribution limits are cumulative, meaning that if you don’t deposit the maximum in one year, you can make up for it in the following years.
If you make withdrawals from your TFSA, you can recontribute the same amount, but not in the same year you took the money out. For instance, if you withdraw $10,000 in 2024, you can re-contribute that $10,000 – in addition to the regular annual limit – in 2025 or later.
Keep in mind that your limit applies across all TFSA accounts you might have. While you can hold TFSA investments at multiple institutions, your contributions must be within the annual limit when added together.
The purpose of a TFSA is to avoid paying tax on investment income, Therefore, it makes sense to use your TFSA room for stocks, ETFs, mutual funds, or fixed-income securities with higher yields so you can eliminate tax on the interest, dividends, and capital gains.
The biggest benefit of a TFSA is that you don’t pay tax on the investment earnings and withdrawals. This is in contrast to an RRSP, which is treated as taxable income when you remove money from your account, whether it’s in the near future or after retirement. TFSA withdrawals are tax-free.
Another benefit of TFSAs over RRSPs is that you are not required to take money out after age 71. This gives you more flexibility to decide how to use your savings. On a related note, any funds you withdraw from a TFSA will not affect other government benefits such as Old Age Security.
There is no lifetime limit per se on a TFSA. Instead, there is the cumulative limit from 2009 (or the year you turned 18) until the current year. You can continue contributing the maximum every year for as long as you like.
For more information about how to best include TFSA’s in your portfolio, call and speak to an investment advisor at the Walton Financial Group in Barrie, Ontario.
