Benefits of a Tax Free Savings Account
Tax Free Savings Accounts, or TFSAs, are a fairly recent addition to the Canadian tax ecosystem. First made available to Canadians in 2008, the TFSA is a way for the average citizen to protect a portion of their savings from income tax.
Tax free savings accounts are somewhat comparable to an RRSP. You invest money into the account and receive a tax break on that investment. When you withdraw money from an RRSP, it becomes taxable again. Money deposited to a TFSA counts as taxable income in the year it is earned, but money withdrawn from a TFSA remains tax-free forever. Provided you don’t over-invest (TFSAs are subject to an annual investment limit. Funds invested above this limit are taxable and may be subject to hefty penalties), the money stored in a TFSA can be used as you please without counting toward your income tax.
Almost any form of investment can be placed into a TFSA, from GICs to stocks, mutual funds, and cash. Investment vehicles can be combined in any fashion as long as they do not exceed the annual contribution limits. This means you can grow your deposited money through investment, then withdraw from your TFSA in the future, reaping tax-free returns on your savings.
In the event of your death, TFSAs can be transferred to your spouse/common-law partner, or any other beneficiary as specified in your will.
Contribution limits are set year-by-year. For 2017, the annual contribution is set to $5,500. If any of the limit is not used in one year, it is carried over to the next year. If you think a TFSA is a good choice for you, talk to your bank about starting one sooner rather than later. Savvy investment and management of your assets now can mean a big payday in the future, whether that means a comfortable retirement or a big vacation.