What is a TFSA?
It is a Tax Free Savings Account – in other words it is an investment account that doesn’t have taxes charged on the gains (the money you make). This means any investment income made above the original sum is yours – rather than yours and the tax man’s. Each year you can contribute $5,500 and part or the whole amount can be taken out at anytime so it is an exceptionally flexible savings account.
Gains on investments are taxed at all different rates based on your income and the type of investment. Take a look at your paycheque – the tax is significant. You are likely paying that tax again on your investment gains.
Three Things To Do Right Now
1. Open a TFSA at any Canadian financial institution
2. Maximize your contribution (check the CRA website for your limit)
3. Chose a few broad index funds to invest in
The flexibility of the TFSA combined with tax avoidance makes it one of the best bets for savings and it is very flexible! The table below shows the key differences between a TFSA and a regular account.
|Scenario||TFSA||Regular savings account|
|Contribution dollars||After tax||After tax|
|Tax treatments of gains||No further tax||Tax on the gain (sell price – purchase price)|
|Types of investments allowed||Any bought through a financial institution||Anything, including traditional financial investments or a home|
|Maximum contribution||$$5,500 per year||Sky’s the limit|
|Redemption||The money can be taken out any time||The money can be taken out any time|
|Repaying||Replacing money in the account can only happen once a year||Money taken out can be replaced anytime|
Want to keep learning about a TFSA? Excellent. Start with the Government of Canada website.