The Tax-Free Savings Account is the most powerful tax-advantaged investment vehicle available to eligible Canadians. Just like other registered accounts like Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP), a TFSA is a tax-sheltered means to grow your wealth. Unlike the other plans however, there is no limit on how you use your savings. It is important to use a TFSA to its full advantage to see your wealth grow, without having to pay tax on the earnings!
You have likely been contributing to your TFSA for many years and know the differences between how it and your RRSP work. The RRSP contribution limit changes each year but is generally 18 percent of your earned income in the previous year. In this way, an RRSP allows you to defer your taxes while saving for retirement. The most important thing to understand is that you will pay tax on this money once you withdraw it.
All forms of income from your investments inside your TFSA are tax-free. This means any interest, dividends and capital gains are yours to keep. It is an excellent savings vehicle, but beyond that, a TFSA is a powerful investment tool. It is important to note that withdrawals made will be added to your TFSA contribution room at the beginning of the following year. TFSA withdrawals can only be replaced in the same year if you have available TFSA contribution room.
Every year you can put more money into your TFSA. You can invest in a multitude of investments including mutual funds, stocks and more. Your wealth advisor will be able to give investment strategies on how to maximize your returns in your TFSA as part of your overall financial plan. Every year, the contribution limit increases and accumulates, which means that if you don’t reach the limit one year, you don’t lose it. Please visit the Canada Revenue Agency website for full details on TFSA limits.
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No matter what you are saving for or how you are planning to use your TFSA savings, there is no wrong answer. Your regular contributions and dedication to saving is ensuring that your future is financially secure.
Here are a few tips to keep in mind to truly maximize the benefits of your TFSA:
There are very few limitations with a TFSA. You can use it to save for a real estate investment, a new boat or for additional retirement income. You can withdraw your money with ease. The funds in your TFSA are always accessible.
Once you make a withdrawal from your account you earn back the contribution room. This gives you the flexibility to use your investments in the way that works best for you. For example, if in 2020, you had $69,500 in your TFSA and you took out $2,500 for a trip, that would leave you with $67,000.
$69,500 - $2,500 = $67,000
You don’t forfeit that contribution room: you are still able to put in an extra $2,500 to meet the cumulative $69,500 contribution limit. You will have to wait until the next calendar year to make that contribution, but you can always make it up!
Since TFSAs are so flexible, they are important vehicles to utilize at every stage of your life and financial plan. As you plan for retirement, and when you reach retirement, there are a lot of considerations for funding your golden years, but also for the financial legacy you will eventually leave behind. As part of your estate plan, a TFSA allows you to transfer funds to beneficiaries, tax-free. For your other assets like property and even your RRSP, your beneficiaries will be subjected to taxation. A TFSA not only gives you flexibility now but also in the future.
Beyond growing your savings and minimizing your taxes, a TFSA can help you achieve your financial goals. From investment, retirement, tax and estate planning a TFSA can bolster your financial future. Talk to a financial advisor today to make use of the TFSA as a powerful investment tool.
Mutual funds, other securities and securities related financial planning services are offered through Qtrade Advisor, a division of Credential Qtrade Securities Inc. Mutual funds and related financial planning services are offered through Qtrade Asset Management Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities.