TFSA basics

The Tax-Free Savings Account or TFSA was created in 2009 to help Canadians save more and potentially earn more interests as well.

The major advantage of a TFSA is that any contribution or withdrawal is tax free. Any gain and interest also are, and they do not affect the contribution room. You do not have to report your TFSA’s activities on your income tax return. It also does not have any impact on amounts from Old Age Security or Guaranteed Income Supplement.

From 2009 to 2012, the maximum contribution was $ 5 000.00 per year. Since 2013, it has increased to $ 5 500.00. If you don’t contribute the maximum amount, you can carry forward the unused contribution amount. Let’s say you opened a TFSA last year. You contributed $ 500 and did not make any withdrawal. Your contribution room for 2014 is $ 10 500.00.

You can have pretty much any type of financial products within your account such as bonds, stocks, cash…. You can also open several TFSAs. However, the annual contribution room is for all accounts.

You need to be 18 and have a Social Insurance Number –SIN- to open a TFSA. You also need to be a resident of Canada. You don’t need an income. Contributions are not tax deductible.

It is important to know your contribution room to avoid over-contributing. It is even more important if you make withdrawals.

Let’s get back to our example above. Let’s say this year you contributed to the maximum $ 10 500.00. You decide to withdraw the full amount to help your child pay for university. Your child decides not to go to university. Unfortunately, you cannot put the $ 10 500.00 back into your TFSA in 2014, as you have no contribution room left. You have to wait for January 2015 to do so.

If you put this amount back in 2014, you will be over-contributing and charged 1% on the highest excess amount for each month the excess remains in the account. You will also have to fill-in plenty of paperwork!

You can check your yearly contribution room with Canada Revenue Agency –CRA-.

A TFSA is definitely an interesting financial tool. Depending on your financial situation, it may actually be the best place to invest your money.

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