Stashing away some extra cash for a rainy day is easier thanks to your Tax-Free Savings Account (TFSA). If you haven't opened a TFSA yet, here's how to take advantage of this savvy way to save big and pay no tax on earned income.
What is a TFSA? Who can contribute?
A TFSA is a registered account that allows Canadian residents to earn investment income tax-free. The contribution rules are simple -- you must be a Canadian resident, have a Social Insurance Number (SIN), and be at least 18 years old.
How much can you contribute?
In 2009 you could contribute up to $5,000 of your after-tax income to your TFSA. Starting this year, the annual contribution limit will be indexed to the inflation rate and rounded to the nearest $500. Assuming an inflation rate of 2% for this year, the limit remains at $5,000 for 2010. Don't worry if you can't muster the maximum amount this year, all unused room can be carried forward to future years.
Contributing even a few dollars to a TFSA every year can add up. For example, investing $1,000 annually at 5% interest saves you from paying around $680 in income tax over 10 years.
Unlike a Registered Retirement Savings Plan (RRSP), contributions made to a TFSA can not be deducted from your income to reduce taxes.
How do you make withdrawals?
Your TFSA contributions and investment returns are always accessible, so you can withdraw the money at any time without paying a penalty or getting taxed. If you need a new roof over your head or suddenly have a car repair, then you can use the money in your TFSA with no questions asked. And any money withdrawn from your TFSA can be replaced at a later date -- you don't lose the contribute space if you use the money.
How do you open a TFSA?
You can set up a TFSA at your favourite bank, credit union, or other financial institutions. Don't forget about smaller online banks -- many offer competitive rates on high interest savings accounts and are just a click away. If you like the offerings at several banks, you can open more than one TFSA. Just be sure that your total contribution amount does not exceed your TFSA room for a given year.
What can you invest in?
Like your RRSP, your TFSA allows for many types of investments, including stocks, bonds, mutual funds, GICs, and cash. If you want to use your TFSA like an emergency fund and have the flexibility to withdraw from it at any time, then you can even keep your cash in a registered high interest savings account.
Does a TFSA impact other income-tested programs?
No. Neither the income earned in your TFSA nor withdrawals from it affect your eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security, or the Guaranteed Income Supplement benefit.
See the Government of Canada Tax-Free Savings Account website for more information.
Your Turn: Do you have a TFSA? Do the think the current TFSA contribution limit of $5,000 is enough?
Why is the amonut a person can contribute to a TFSA limited to $5000.00. I personally would like to see that amount doubled or even trippled.
Posted by: Sam Neill | 01/19/2010 at 10:42 AM
Sam: As much as the government wants to encourage you to save, it also doesn't want to lose out on the tax money it would have collected on your interest. For most of us, it wouldn't be an issue, but think about people making hundreds of thousands, or even millions of dollars. If they were to put a lot of that into a limit-less TFSA instead of a regular bank account, they're earning quite a bit of tax-free interest!
Posted by: MrsMat | 01/19/2010 at 01:37 PM
If you have $10,000 in a TFSA this year and you take out $5,000 you can not put that $5,000 back in until next year without being penealized.
Posted by: Marcus | 01/19/2010 at 03:29 PM
this artical states 5% interest --where can you get this rate??? my bank will only give us 1.25% and even then they want us to lock in the account
Posted by: victor tully | 01/23/2010 at 02:42 PM
Victor, the best way to optimize a TFSA in my opinion is to have mutual funds or stocks in it, when interest rates come back up, then I might look into a basic savings or gic.
Posted by: Me | 01/25/2010 at 03:52 PM
See any 5% rate in the latest from BMO info...??? What bank are you dealing with
Annual / Annual Compound
Interest Payment Option
$1,000 -
$99,999
$100,000 -
$249,999
$250,000 -
$999,999
1 year - under 18 months
0.400%
0.400%
0.400%
18 months - under 19 months
0.750%
0.750%
0.750%
19 months - under 2 years
0.400%
0.400%
0.400%
2 years - under 3 years
1.150%
1.150%
1.150%
3 years - under 4 years
1.450%
1.450%
1.450%
4 years - under 5 years
1.600%
1.600%
1.600%
5 years - under 6 years
2.000%
2.000%
2.000%
6 years - under 7 years
2.000%
2.000%
2.000%
7 years exactly
2.100%
2.100%
2.100%
10 years exactly
2.300%
2.300%
2.300%
Posted by: BFS | 01/28/2010 at 12:09 PM
If you are over 45 you can set up a TFSA at Desjardins for guaranteed 7%, each year for ten years.
If you can treat this like a pension its great, if not go to the bank and see what they can offer.
Posted by: Brian Poncelet, CFP | 02/05/2010 at 07:26 AM
There still seems to be alot of confusion about TFSA's and interest.
A TFSA is not a regular savings account so talking about different banks interest rates is irrelevant. A TFSA is more akin to a trading account or an RRSP (it is NOT an RRSP just go with the metaphor for a moment). The funds you put into the TFSA (after tax dollars)do not have to remain dormant in the account collecting the banks standardar interest. That's not to say they can't; if you choose to leave the money there than regular interest rates apply and plenty of comments here clearly outline different banks rates. However, should you choose to have your broker / bank / invest advister invest those funds in mutual funds, bonds, stocks, etc for you than the interest gained on your TFSA money can be substantially higher than the banks interest rate. This invested interest rate is the one that Kerry is referring to and not to the interest rate given by banks to saving accounts with dormant funds.
The best part of a TFSA and one of the largest differences between a TFSA and other types of non-RRSP based investments is that you don't pay any tax on any income or interest received. With a regular trading account you have to pay captial gains but not with a TFSA.
So, if you have a trading account and have done well in the market and choose to sell some of those assets you will pay a captial gains tax. However, if you had held those assets in your TFSA that money would go directly to you and none to tax. With the markets having increased substantially in the past year those of you who put money into their TFSAs and invested it well will be laughing tax-free all the way to the . . . uh, bank.
Posted by: Andrea | 02/23/2010 at 01:37 PM
As much as the government wants to encourage you to save, it also doesn't want to lose out on the tax money it would have collected on your interest. For most of us, it wouldn't be an issue, but think about people making hundreds of thousands, or even millions of dollars.
Posted by: Gainesville dentists | 09/21/2010 at 05:09 AM
The saving account is good for healthcare system.In which we get lower cost but best quality.
Posted by: isa savings | 10/06/2010 at 06:47 PM
oI appreciate the concern which is been rose. The things need to be sorted out because it is about the individual but it can be with everyone
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jakejaden111
Best Savings Accounts
Posted by: jakejaden111 | 11/06/2010 at 12:30 PM
Informatively written. Who wouldn't want a tax-free savings account? I think if you turned 18 in 2009 or earlier then you have a TFSA contribution room maximum of $10,000.
I also think it allows investment for a 101 Plan too.
Posted by: Brett Guaranteed Returns | 11/25/2010 at 04:01 PM