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The Tax-Free Savings Account (TFSA) is a way for individuals who are 18 and older and who have a valid social insurance number to accumulate savings with special tax-free privileges throughout their lifetime. You don’t need to be working to contribute to a TFSA. Contributions to a TFSA are not deductible for income tax purposes (you won’t receive a tax refund for contributions to a TFSA). However, amounts contributed as well as any income earned in the account (for example, investment income and capital gains) can be withdrawn tax-free. Plus, you can withdraw your money at any time.
TFSAs Aren’t a Savings Account, They’re a Tax Shelter
TFSAs are misnamed. They’re a tax shelter, not a savings account. Inside your TFSA, you could have a savings account, but you can also choose from other investment options such as a GIC, a term deposit, a mutual fund, a segregated fund, an ETF, stocks, bonds or real estate. You won’t receive a tax refund for the money you’ve contributed, but you won’t pay income tax on your money (initial contributions and growth) when you take it out. If you withdraw your money when you are in the same tax bracket or higher tax bracket as you were when you put your money in, you’ll save money on income taxes. Also, any money you withdraw isn’t considered income. Therefore, it doesn’t need to be declared on your income taxes and it’s excluded from income testing (such as when someone moves to a long-term care facility or applies for subsidized housing).
How Well Your TFSA Performs Depends on How It’s Invested
The type of investment you choose to put in your TFSA impacts your rate of return. If you’re investing for retirement, you are investing for the long-term, and you should definitely consider investment options with a higher rate of return. If you’re investing for the short-term (such as rainy day savings, or saving for a trip), you should consider investments with less volatility so that you don’t lose money on your investment.
And Finally…
TFSAs are one of the best way to reduce the income taxes you pay on your investments. There are no downsides to reducing your tax bill – it just means you’ll have more money in your pocket.
Let us know if you’d like to learn more about TFSAs, investment options for your TFSAs, or if you’d like to boost your savings with a TFSA loan.