When life is full of projects
WHAT IS A TFSA?
A Tax-Free Savings Account (TFSA) is a registered
plan in which you can set money aside tax-free
for various projects throughout your lifetime.
HOW IS IT DIFFERENT FROM AN RRSP?
Unlike an RRSP, which is designed to focus on retirement, a TFSA affords a lot of flexibility focusing your savings to carry out different projects. The main difference between the two plans is the tax aspect. Money invested in a TFSA is not tax deductible. Then again, when you make a withdrawal, no tax is charged on the withdrawal. In comparison, RRSP contributions are tax deductible, but withdrawals are fully taxable. You can usually withdraw money from your TFSA at any time† and for any reason without tax consequences. You can even re-contribute withdrawn amounts in subsequent years, although there is no obligation to do so.
WHO CAN CONTRIBUTE TO A TFSA?
Anyone 18 years of age or over can contribute
to a TFSA. There is no age limit.
ADVANTAGES OF A TFSA
• The income you earn on your investments
is not taxed. Your savings grow sheltered
• The flexible withdrawal rules allow you to
save for a rainy day or a special project.
• Unlike an RRSP, a TFSA allows retirees to
grow their savings and shelter them from
taxes throughout their lifetime.
• TFSA withdrawals are not considered
income when qualifying for certain
government benefits. Benefit recipients can
therefore use the money in their TFSA and
their benefits will not be affected.
• Investors who contribute the maximum to
their RRSP have a second savings vehicle
that provides tax-sheltered growth.
HOW ARE TFSA LIMITS CALCULATED?
Whereas RRSP limits are based on the amounts reported on your income tax return (up to a maximum limit), TFSA contribution limits are set by the government of Canada and are not affected by income levels.
SPOUSES AND TFSA
Unlike an RRSP, you cannot use your unused TFSA contribution room to contribute to your spouse’s TFSA. Contributions to your TFSA will always be applied against your own TFSA contribution limit. However, you can give money to your spouse, who can then contribute to his or her own TFSA, and you will not be taxed on the income earned in your spouse’s TFSA. This provision allows a married or common law couple to take advantage of income splitting, even if one spouse does not earn income. In the case of divorce or separation, if you must share the amounts accumulated in a TFSA, the transfer can be made directly from your former spouse’s account to
yours, or vice-versa. Such a transfer does not affect either individual’s eligible contribution room.
WHICH INVESTMENT TO CHOOSE?
The TFSA offers multiple options, similar to an RRSP. For example, you can choose readily cashable investments to take advantage of the TFSA’s flexibility in an emergency or choose to invest in a product with a longer investment time horizon in preparation for a major project or to
supplement your retirement income. Since capital losses on investments held in a TFSA (or an RRSP) are not tax-deductible, it may be more
advantageous, from an income tax perspective, to choose investments with a low risk of capital loss.