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Tax-free Savings Accounts(TFSA)

As the tax season approaches in Canada, you will hear a lot of acronyms being tossed out, like TFSA and RRSP. But what does it mean? Do you know where and how to invest your money wisely? Are you planning to invest at all? You know you should be saving up that stack of cash for a rainy day, but it can be overwhelming trying to figure out which direction to move in if you are not familiar with those financial lingos. Let’s take a closer look into TFSAs – Tax-free savings accounts – and clear some key factors.

Understanding TFSA

The Canadian government proposed the Tax-Free Savings Account (TFSA) agenda in the 2008 Federal Budget. It came into relevance on January 1, 2009.

It is an investment tool that lets your capital grow and accumulate tax-free. It means you don’t pay taxes on the money you make inside your TFSA, such as interest, dividends, and capital gains.

Your TFSA limit regulates how much you can credit into your TFSA account each year. Fortunately, it is not “use it or lose it” scenario – this limit gathers over time if you don’t use it. The TFSA is designed to help individuals contribute to their savings without having to pay tax on the earned interest. TFSAs are not deductible for tax purposes, but they are accessible without penalty.

Calculating Your TFSA for 2018

With the TFSA limit at $5,500 for 2018, the total capacity available in 2018 for someone who never contributed is eligible for the TFSA since its evolution in 2009 is $57,500.

For those clients who have withdrawn from TFSAs, their preserved profits and losses factored into their TFSA room. The formula is:

Unused TFSA contribution room to date + Total withdrawal made in this year + Next year’s TFSA dollar limit = TFSA contribution room at the beginning of next year.

You don’t have to set up a TFSA to earn contribution room.

If there is no TFSA, then you can open one and contribute a maximum of $57,500.

If you already have a TFSA, started saving, and never withdrawn money from your account, you can keep adding until you reach the current TFSA limit.

Benefits of Your TFSA

Calculating your TFSA would prove beneficial for you in multiple ways. Let us find out how.

  • Flexibility to withdraw and contribute- The most significant benefit of your TFSA is you can withdraw money from your account at any time, for any reason, tax-free. Also, you can re-contribute any amount you remove in the following year plus your contribution room for that year.
  • Freedom to invest in almost anything- Imagine having more returns than giving away in a tax file return. With a TFSA, you can invest in anything through your TFSA including cash, Guaranteed Investment Certificates (GICs), mutual funds, bonds, stocks, etc.
  • Tax-free Growth to Your Investments- It allows your saving to grow much faster than they would elsewhere. For example, if you have invested in shares and it doubles in value, holding it in your TFSA denotes you not to pay any capital gains tax on your earnings. If this stock pays out a dividend, no tax is levied on that either. This rule applies to all assets held in a TFSA.
  • No Income Required to Contribute to TFSA- You start collecting contribution room irrespective of your current employment status. You earn TFSA contribution room the day you turn 18 even if you don’t open an account.
  • Doesn’t Affect Your Eligibility for Other Tax Benefits- Since withdrawals from your TFSA do not count as taxable income, your eligibility for government tax benefits such as Old Age Security and the Guaranteed Income Supplement remain unaffected.
  • Accumulate Extra Contribution Room- If you live in a province where the age of minority is 19, you can still accumulate contribution room from the age of 18 onwards. In this way, you don’t have to worry about missing out an entire year’s worth of contribution room.
  • Utilize Unused Savings- You can carry ahead your unused contribution room in your TFSA to the succeeding year. If you withdraw your savings from TFSA, the full withdrawn amount can be put back at a later date still with maximum savings each year.

With so many advantages galore, use a TFSA to shelter investments that accrue tax at the highest rate. You may want to get some professional advice on how you can make the best out of your TFSA as a useful part of your tax planning.

There is a range of TFSA options available in Edmonton to meet the needs of different investors, including savings accounts, term deposits, mutual funds, stocks, and bonds.

For an easy and time-saving process, talk to one of our best financial institutions in Edmonton to get more specific assistance. You can speak to our team of financial advisors here. Book your free consultation to chat with us today.

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