A Tax-Free Savings Account TFSA is a registered savings vehicle that allows you to invest at any age and earn tax-free income to help make your plans happen.
The TFSA is for Canadian residents aged 18 and over who want to build their savings tax-free.
Unlike an RRSP, your TFSA deposits aren't tax-deductible, but the money you withdraw (including interest earned on your investments) isn't taxed.
When you make a withdrawal from your TFSA, it opens up the same amount of room in the account, dollar for dollar, so you can catch up on your contributions later.
You can contribute up to $5,000 per year to your TFSA.
But you won't lose your contribution room if you don't max it out. Any unused amounts will just be added to your limit for the following year. The same thing applies to withdrawals – whatever you take out you can put back in later on.
Starting in 2010, your TFSA contribution room will appear on your Notice of Assessment. The Canada Revenue Agency (CRA) sends you this document each year after your tax return has been processed.
*Some exceptions have been in place since October 2009. For more information, see the Canada Revenue Agency (CRA) website.
RRSPs are designed to encourage you to save for retirement. TFSAs, on the other hand, are designed to help you save for anything you want (including retirement).
What about taxes? With an RRSP, you get tax deductions or refunds when you contribute or file your return. TFSA contributions aren't tax-deductible, but you don't pay tax on any money you take out (unlike RRSP withdrawals, which are taxed).
Check out our TFSA vs. RRSP table for an overview of the main differences between the plans.
Even though you have to wait until your 18th birthday to open it, you can still contribute $5,000 for that year. For instance, if you'll be turning 18 on November 1, you'll have two months (until December 31) to contribute up to a maximum of $5,000.
Contribute early and often. Time is your friend when it comes to savings.
No, and that's one of the best things about it. You can take money out of your TFSA when you need it most, and there aren't any tax consequences!
This means that the investment income earned in your TFSA and your withdrawals won't affect income-tested benefits such as:
Similarly, TFSA withdrawals and investment income won't affect credits like the:
Check out the Canada Revenue Agency's (CRA) website for more information.
Have you ever had to rely on credit to make a major purchase? Then you know how frustrating it can be to have to make payments for what seems like forever. And the interest payments on top of it just add insult to injury.
When you've got money stashed away in a TFSA, you can pay off purchases sooner. Why pay interest on a credit card when the interest earned on your investment will grow tax-free? When the time comes to buy, you'll be able to pay for your purchases cash down.