The tax free savings account (TFSA) has been available to Canadians for over a year now. One of the benefits of being a year older is that you now have another $5,000 of contribution room available to invest in your TFSA. If you turn 18 in 2010 then you only have a maximum limit of $5,000 for your TFSA. If you turned 18 in 2009 or earlier then you have a TFSA contribution room maximum of $10,000.
My wife and I have made full use of our TFSA room because we have a $20,000 emergency fund which fits our TFSA accounts like a glove. There are many different potential uses for TFSA accounts, but keeping an emergency fund is a good one, since all interest earned in the account is tax free. We keep the emergency fund TFSA at ING Direct – see my bonus offer here.
The basic rules haven’t changed since last year – the only difference for 2010 that I know of is a more punitive over-contribution penalty. I’m not going to get into the exact penalty but suffice to say – don’t contribute more than the allowable amount to your TFSA!
Basic TFSA rules for 2010
- Contribution room increases by $5,000 per year starting in 2009.
- Unused contribution room carries over indefinitely.
- Any contributions made to the TFSA will result in a similar reduction to your available contribution room.
- Any withdrawals from your TFSA will result in a similar addition to your available contribution room but only effective Jan 1 of the following year. See my “December strategy” for details on this.
- All income earned in the TFSA is not taxable.
- All withdrawals are not taxable.
- There is no “contribution receipt” issued for TFSA accounts. Any money contributed to a TFSA has already been taxed (at your personal income level) and doesn’t get taxed again. This is similar to the American Roth IRA account. RRSP contributions on the other hand are considered pre-tax and you get a tax receipt for them.
- You can have multiple TFSA accounts at different financial institutions. However it is up to YOU to keep track of your contributions. The government knows if you go over the limit and will charge an over-contribution fee. Don’t expect any kind of friendly phone call if you go over your limit – the government will just start charging the fee and it will be payable on your next tax return.
