TFSA – Tax Free Savings Account – Save $1,000’s
Tax Free Savings Account (tfsa)
The tax free savings account (also known as TFSA) account is a wonderful account. If you are a Canadian citizen, you should be doing your best to take advantage of it.
Similar to the American’s Roth, the Tax Free Savings Account is a Canadian registered account using after tax dollars. Basically that means the government has already gotten their chunk of taxes from this money. So all money in it as well as the gains you have acquired during those years can be pulled out at any time you would like, tax free! Fantastic.
It’s actually better than a Roth though, since money can be pulled out at any time. Perfect if you want to retire early!
This makes it a great investment account. One of the big things I really like about it is that you can pile up a nice chunk of change and then move it to another vehicle if you like. For example – you could pull out $40,000 and put that towards a $200,000 rental unit. (20% down)
The following year you would regain that 40 thousand contribution room back to your tfsa. This gives you lots of options and flexibility.
If you are over 18, you can and should setup a tfsa. The government sets the yearly limits you can add to your tfsa (based on inflation). If you haven’t actually contributed yet, and have been over 18 since 2009. The total amount of money you can put into your tfsa is $75,500.
Contribution Room Added Each year
|Contribution Year||Contribution Amount||Total Room Available|
If you turned 18 sometime in 2015 your total room for contributions would be $44,500. Previous years don’t count if you weren’t 18 that year. You may say that sucks, since you missed out on the previous years. But I was 24 when they introduced the tfsa. I missed out on 6 years of potential tfsa growth while you get the benefit of contributing every year since you turned 18. Not so bad now, is it?
You can basically buy anything in your tax free savings account stocks, bonds, mutual funds, etfs, gic’s and savings accounts…….. Although foreign dividend paying stocks do get charged a withholding tax, unlike the RRSP. Combine both the rrsp and tfsa accounts in your portfolio to create a diversified dividend portfolio.
Personally we keep all Canadian stocks and funds in the Tfsa account and us and international stocks/funds in our rrsp’s for tax simplicity.
Don’t Over contribute!
One really important thing, don’t ever over contribute! The tax man will get you. Also if you pull out any money from a tfsa, you cannot re contribute that money into your tfsa the same year. ( If your maxed)
Ie. It’s 2017 You have a maxed out Tfsa at $52,000. You see that shiny 2014 Lotus Exige (my dream car) and the owner needs money. He’s posting it for $40,000. Naturally you low ball him and agree to buy it for 35k. Sweet! Congrats, now come pick me up! After a couple months you decide you don’t want it anymore. It has too much power, and too many ladies keep heckling you…. You call me up. Hey Rob you want that lotus? I’ll sell it to ya for 35k. Sure I say here’s 35 thousand.
You would like to re contribute that back to your tfsa right away. Then you remember that great article you read awhile back about tfsa’s. It told ya if your maxed out for contribution room you can’t put the money you took out until the following year, Next January. Sorry guess its going into that ugly savings or chequing account until next year.
How Do You Find Remaining Room
A easy way to see how much you can contribute this year is by going to the Canadian Revenue Agency’s Website. You can login to my account and figure out what you can put in that year. Only downside is it’s only updated at the start of the year. You need to track it during the year if your that close.
Let’s say your one of the smart one’s and your tfsa was maxed out and the stocks have done amazing. Instead of having $52,000 in your account, you have $75,000. Nice job. You want to put that down on a house or cottage. You pull it all out. (no penalties) Next year you can contribute $75,000 plus whatever the government’s annual tfsa increase is for that year. The Tfsa Ceiling increases based on your investments.
The Tax Free Savings Account is a fantastic retirement investment vehicle. If you were 18 when you started and for simplicity the yearly max contribution was $5000. You contributed once a year $5000 for 30 years and averaged a 6% return. Your tfsa balance at 48 years old would be $407,162.24 but you only paid tax on $150,000. What if you kept going til you were 60 years old. With the same numbers you would have $920,168.91 but you only paid tax on $210,000. START THE CAR!, START THE CAR!
The government has done a great Job in providing Canadian’s 2 incredible savings account’s. The TFSA and the RRSP. They both have advantages and dis-advantages. If you use both tool’s and max them out, surely you will have a financially secure future. Now go out there and start those accounts!
If you have kids who will be going to college or university the RESP is also another registered account, you should take advantage of. The government will pay you to save!
If you have any questions, feel free to ask. I’ll do my best to answer them for you.
Hey I’m Rob, creator of Passive Canadian Income.
In 2011 me and my wife had almost $60,000 in debt and a negative $7,000 Net Worth. Through hard work and financial education we paid all that off. Now we are focusing on increasing our Passive Income Streams to make the money work for us. Feel Free to Follow along the Journey by clicking the Social Media links below or subscribing to get notified of new posts on the sidebar.
I always contribute to my RRSP first as I get a tax refund. With the refund, I contribute to my TFSA. This way, I get the benefit of both accounts.
This is what I’m currently in the process of doing. Great to hear!
I take advantage of my Roth IRA right now while I still can. Hopefully in the future I’ll make enough money where I’ll phase out but until then I’ll take advantage 🙂 Curious why did it bump up to $10,000 in 2015?
What do you mean you will phase out.?
The 10,000 was setup by the conservatives to be the new annual limit. Unfortunately the Liberals got into power the following year and lowered the limit. “They felt only the high class could max out the 10k yearly” I’m sure they didn’t like how they can’t tax the future gains and wanted to cap it lower. Dam liberals!
I am in the process of adding more to RRSP now. Like your blog. Adding to my blog list
Thanks a lot Pellrider, That’s the ultimate compliment =)
We are currently setting up a direct investing account for our rrsp. It would be great to get some u.s. exposure. As well as more money back come tax time.
Nonetheless, using tax-advantaged accounts early on can only help in building your wealth because the longer you stay invested in those accounts, the longer you’re compounding your money tax-free or tax-deferred.
If an account-holder withdraws funds from a TFSA, his or her contribution room is increased by that amount in the tax year after the withdrawal.
Yup thats true.
I’m a Canadian citizen who’s been living abroad since June 1996. I lived in Canada prior to June 1996 for 26 years. I’m now 50 and planning to return to Canada next spring. I never contributed to the TFSA as i was not living in Canada in 2009. Will i be able to contribute the maximum amount of the $52,000 CAD when i return to Canada in 2018?
Hey Jesus. Sorry I have no clue to be honest. I would check the cra website cra.ca or talk to a cpa. Again sorry for not knowing lmk if you find out.