TFSA - Canada"s Tax Free Savings Account and How You Can Benefit
Beginning in January 2009, Residents of Canada of legal age will be able to invest in a new savings vehicle called the Tax Free Savings Account, or TFSA.
Announced in the 2008 Federal Budget, the TFSA not only provides tax free growth for life, you can withdraw from the funds without penalty at any time.
Contributions up to $5000 per year are allowed into your TFSA.
Any portion of the allowable contribution not used can be carried over to the following year on an indefinite basis.
Additionally, the Tax Free Saving Account limits are not based on income, nor are there any maximum age limits.
However, a TFSA cannot be placed in a trust for minors or those under 18.
Likewise, it is not permitted to have joint accounts although it is perfectly feasible to contribute into a second account in your partner's name in the event that one partner earns significantly more than the other.
Your ability to save in an RRSP is not affected by your investment in a TFSA, and neither are your RRSP contribution limits.
One should however take note that unlike an RRSP, TFSA savings are not tax deductible.
A TFSA allows holders to withdraw from their account anytime they wish.
Additionally, there are no tax obligations regarding any funds withdrawn and neither will such withdrawals affect any income-tested federal benefits.
Furthermore, holders of a TFSA may redeposit any withdrawal amount without jeopardizing the overall allowable contribution limit.
However, such deposits may only be made in the following calendar year.
A TFSA may incorporate identical forms investments as are allowed in a RRSP.
These include but are not limited to: cash, government bonds, corporate bonds, mutual funds, and stocks.
Holders should be aware that while there are penalties for exceeding the contribution limit, these penalties are far less severe than those enforced if you are found to be holding ineligible securities in your TFSA.
If in doubt, always be sure to ask! A spouse or legally recognized partner who has been named as a beneficiary is permitted to receive the TFSA of the deceased and will not become liable for tax on the money received.
Likewise, if you inherit a TFSA, you can include it into your own TFSA without affecting the allowable contribution limit.
However, any interest which accumulates after the original owner's death will become liable for tax.
In the case of a divorce or other legal separation, a TFSA or part thereof may be transferred to the other partner or to their TFSA account without having any impact on the contribution limit.
To better explain the concept of carrying over an unused portion of your yearly limit, let's take a look at a small example: In 2009 you open a TFSA with every intention of investing the full $5,000 but due to circumstances, you are only able to invest $4000 which in turn would allow you to carry the additional $1,000 over to the next year.
In 2010 you invest the full $5.
000 as well as the $1,000 which you carried over, thus giving you a total investment of $10,000.
In 2011 you don't invest anything but instead; you withdraw $2,000 which then leaves you with $8,000.
In 2012 you could in turn invest $5,000 plus the previous year's $5,000 plus the $2,000 which you withdrew.
Therefore, in 2012 you could invest $12,000 which would be added to the $8,000 you already had in.
Announced in the 2008 Federal Budget, the TFSA not only provides tax free growth for life, you can withdraw from the funds without penalty at any time.
Contributions up to $5000 per year are allowed into your TFSA.
Any portion of the allowable contribution not used can be carried over to the following year on an indefinite basis.
Additionally, the Tax Free Saving Account limits are not based on income, nor are there any maximum age limits.
However, a TFSA cannot be placed in a trust for minors or those under 18.
Likewise, it is not permitted to have joint accounts although it is perfectly feasible to contribute into a second account in your partner's name in the event that one partner earns significantly more than the other.
Your ability to save in an RRSP is not affected by your investment in a TFSA, and neither are your RRSP contribution limits.
One should however take note that unlike an RRSP, TFSA savings are not tax deductible.
A TFSA allows holders to withdraw from their account anytime they wish.
Additionally, there are no tax obligations regarding any funds withdrawn and neither will such withdrawals affect any income-tested federal benefits.
Furthermore, holders of a TFSA may redeposit any withdrawal amount without jeopardizing the overall allowable contribution limit.
However, such deposits may only be made in the following calendar year.
A TFSA may incorporate identical forms investments as are allowed in a RRSP.
These include but are not limited to: cash, government bonds, corporate bonds, mutual funds, and stocks.
Holders should be aware that while there are penalties for exceeding the contribution limit, these penalties are far less severe than those enforced if you are found to be holding ineligible securities in your TFSA.
If in doubt, always be sure to ask! A spouse or legally recognized partner who has been named as a beneficiary is permitted to receive the TFSA of the deceased and will not become liable for tax on the money received.
Likewise, if you inherit a TFSA, you can include it into your own TFSA without affecting the allowable contribution limit.
However, any interest which accumulates after the original owner's death will become liable for tax.
In the case of a divorce or other legal separation, a TFSA or part thereof may be transferred to the other partner or to their TFSA account without having any impact on the contribution limit.
To better explain the concept of carrying over an unused portion of your yearly limit, let's take a look at a small example: In 2009 you open a TFSA with every intention of investing the full $5,000 but due to circumstances, you are only able to invest $4000 which in turn would allow you to carry the additional $1,000 over to the next year.
In 2010 you invest the full $5.
000 as well as the $1,000 which you carried over, thus giving you a total investment of $10,000.
In 2011 you don't invest anything but instead; you withdraw $2,000 which then leaves you with $8,000.
In 2012 you could in turn invest $5,000 plus the previous year's $5,000 plus the $2,000 which you withdrew.
Therefore, in 2012 you could invest $12,000 which would be added to the $8,000 you already had in.
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