Let’s take a moment to look at the Tax Free Savings Account (TFSA) and dispel a few common myths about this relatively new savings tool for Canadians. For those of you unaware of what a Tax Free Savings Account is, they're accounts that you can save for the short term or long term where your money grows tax free and your withdrawals are also tax free. TFSA’s can be invested in many different options from mutual funds, ETF's, stocks, bonds, GIC’s, or cash.
Let's now look at some of the myths that many Canadians still believe about the TFSA:
#1 TFSA’s are just a glorified savings account
-Not true! Although these accounts can be made to do just that, many people would be much better off using them as investment accounts allowing maximum growth on your money while not having to pay tax on that growth. This includes any interest, dividends, or capital gains. The withdrawals are also tax free!
#2 TFSA’s will cause clawbacks of other gov’t benefits (child tax, OAS, GIS)
-Not the case! As mentioned already, when you withdraw money from the TFSA it is completely tax-free so it will not count towards your taxable income.
#3 Use RRSP first, TFSA second
-Not always true! Every individual has a different financial/tax situation, so it really comes down to what your tax rate is today and your tax rate upon withdrawal. Typically, if you are in a higher tax bracket today and a lower one in retirement then deferring the tax today through an RRSP to pay at a lower tax rate later makes sense. Alternatively, if you expect your income to be higher in retirement than focusing on TFSA contributions first would make sense. Every situation is different and I would recommend reviewing your unique situation with a financial planner if unsure of how to utilize these accounts as other factors may come into play as well.
#4 If you don’t use your contribution room every year, then you lose it
-False! Any contributions not made in a calendar year can be carried forward to the next year. An example would be if in 2018 you had $5500 contribution room in your TFSA and didn’t contribute, then the next year you could contribute $11,500 ($5500 for 2018 and $6000 for 2019). Also, if you were 18 years of age as of 2009 and never opened a TFSA, then you could open one this year and contribute for every year in one lump sum to a total of $63,500.
#5 You can only have one TFSA account
-Nope! You can have as many different accounts as you would like. The only catch is you cannot have cumulative contributions of all the accounts together over your contribution limit. It would be wise to have only one or possibly two TFSA accounts to keep things simple when it comes to contribution limits, so as not to go over and get penalized by Canada Revenue Agency.
The TFSA is a wonderful savings tool available to Canadians, and when used right could equate to a substantial nest egg with substantial tax savings. Contact us with any questions you might have on the TFSA or anything else. Happy Saving!
-link to TFSA contribution room calculator:
https://personalfinancecanada.ca/tfsa-contribution-limit-calculator
-Marty Metz, CFP
CERTIFIED FINANCIAL PLANNER
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