Since its introduction in the budget of 2008, Tax-Free Savings Account or TFSA have gained wide popularity as a savings vehicle amongst the general Canadian population. Although it is not exclusively a savings account, this scheme encourages Canadians to start a savings account early so they do not have to worry about emergency funds. Other than using this scheme solely as a savings vehicle you can use this account for a whole array of financial instruments such as bonds, stocks, exchange-traded funds and guaranteed investment certificates. If you want to open an account under this scheme and start investing, consider getting in touch with InsLyf Brokerage, we look forward to hearing from you.
So, how does a TFSA account work?
It works for any other savings account, but there are some rules that you should know of. The first step of course is that you put in your funds and then relax as you watch it grow. With TFSA, you get the flexibility of withdrawing at any time you want without worrying about taxes. The amount you withdraw, you can easily contribute back in the next term. However, what you should know is there is a contribution limit that stands at $6000 now and if you contribute beyond that amount you will have to pay a 1% surcharge every month till the extra fund is withdrawn. If the amount of money increases due to the growth of your investments or due to interest earned, that would not be counted as a part of your annual contribution. For further details, you can speak with our financial advisors.
You can use your TFSA account as an income-splitting tool to lower the overall tax burden on your family’s income. The way it works is the higher-income spouse lends money to a lower-income spouse so they can contribute the funds to their TFSA. For example, the higher-income spouse will not be getting a tax deduction, as they would with a spousal RRSP. Still, the advantage is that the interest earned on the money invested in a TFSA isn’t taxed. There are potential negative tax implications when attempting such a manoeuvre using non-registered investments. You can talk with one of our advisors about what might make sense for you.
Benefits of a TFSA account
Investments inside this scheme grow tax-free and it lets your investment compound faster without the drag of annual taxes.
Withdrawals can be made at any time without any withholding tax.
You can share the contribution room with your spouse; it helps them maximize their tax-sheltered space as well.
With TFSA, the average Canadian family can shelter 32% of their income in tax-deferred accounts.
The withdrawals will not impact any government benefits which is especially helpful for low-income seniors who receive benefits with high claw-back rates.
On top of everything, TFSA accounts can remain active throughout your lifetime and your savings can grow tax-free throughout that period.
TFSA vs RRSPs
There are two major differences between these two schemes which make TFSA a better option over its counterpart. With RRSP, your withdrawals are taxed and you will have to make a mandatory withdrawal once you turn 71; TFSA does not have any such conditions. However, you can always go for both schemes and save more. Contact InsLyf Brokerage for all the information you need on both these schemes and start your savings journey today.
Schedule an appointment with our team at InsLyf Brokerage to resolve any queries regarding TFSA schemes.