The tax free savings account (TFSA) has been available to Canadians for a while now. One of the benefits of being a year older is that you now have more contribution room available to invest in your TFSA.
If you turn 18 this year, your contribution limit is $10,000. If you turned 18 prior to this year, your TFSA contribution room will be $5,000 per year starting from the year you turned 18 or 2009, whichever is later up to to 2012. 2013 and 2014 have $5,500 contribution limits and 2015 is $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 how to get a $25 bonus here from ING.
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The basic rules and limits haven’t changed since last year. Make sure you understand how the withdrawal rules work (withdrawal amounts get added to your contribution room starting on Jan 1 of the NEXT year).
Basic TFSA rules for 2015
- Contribution room increases by $5,000 per year starting in 2009 or the year you turned 18, whichever is later until 2012
- Contribution room for 2013 and 2014 is $5,500 for the year..
- Contribution room for 2015 is $10,000.
- Contribution room for 2016 is $5,500.
- 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 January 1st 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.
- 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.
Type of investments allowed in TFSA accounts
It’s a common perception that only bank accounts and GICs are allowed in TFSAs. This is not true – whatever investments are allowed in an RRSP account are also allowed in TFSAs. Stocks, bonds, mutual funds, index funds, ETFs (Exchange Traded Funds), GICs, high interest savings account are all eligible for TFSAs.
Where to set up a TFSA Account
Plenty of TFSA options:
- Discount brokerage – This is the place to buy stocks, ETFs, bonds, mutual funds, index funds. See my Canadian online discount brokerage comparison for a complete look at options and fees. Questrade brokerage is my personal favourite.
- Banks – This is the most convenient option for high interest savings accounts and GICs.
- Financial advisor – If you have an advisor of some sort, they should be able to set up an account for you.
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