There has been a lot of talk about Tax Free Savings Accounts (TFSAs) since they came out in 2009. TFSAs are fairly new and there has been a lot of confusion about some of its features and limits. The purpose of this article is to eliminate any confusion and give you an idea on how you can benefit from a TFSA.
What is a Tax Free Savings Account? It is a registered account that allows Canadians to earn tax free income from their investments within the TFSA. How can you open a TFSA? You can open a TFSA through a financial institution such as a bank, credit union or insurance company. Once you have a TFSA set up, you can hold various investments. These investments include, but are not limited to stocks, bonds, cash, GICs (Guaranteed Investment Certificates), mutual funds, and segregated funds.
You can contribute up to $5,000 annually into a TFSA. One of the misconceptions out there is that if you do not contribute, then you lose your $5,000 contribution room. Fortunately, that is not true and the $5,000 contribution room is carried forward. Therefore, if you did not contribute into a TFSA since they were launched in 2009, you can invest a lump sum of $15,000 and start earning tax free investment income. The contribution room starts to accumulate once you turn 18. A small inconvenience in regards to your TFSA is that once you withdraw from it, you will have to wait until next year to re-invest that amount. For example, if you contributed $15,000 in January of 2011 and decided to withdraw $12,000 to purchase a used car, you will have to wait until January 2012 to be able to invest any more funds into your TFSA.
TFSAs are advertised as a “savings” account when in fact they can be used for an investment account. There is nothing wrong if you are using it as a savings account but if you also have an investment account that is generating income growth, it would be wise to have the investment account as a TFSA. The advantage of having your investments inside a TFSA is that any income generated within will be tax free. In addition, you also avoid the hassle of including any income within a TFSA on your tax return. I always find it convenient when I can simplify my tax return.
In conclusion, TFSAs are a great tool to avoid paying taxes on income generated from your investments. TFSAs simplify your tax return. If you do plan on opening a TFSA and doing some investments, consult with a Financial Security Advisor as everyone’s situation is different and often requires its own unique solution.
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