Canadian Taxation

Tax-free savings accounts: 10 things you need to know

Published On April 9, 2013 | By Joseph (Ken) | Personal tax

taxesSome info on the TFSA (tax-free savings account) – consider using a TFSA as a savings account.

Tax-free savings accounts: 10 things you need to know

Tax-free savings accounts are a good way to sock away cash. Here are 10 things you need to know about them:

1. How do they work?
Unlike a Registered Retirement Savings Plan (RRSP), the contributions are not tax-deductible. So you deposit after-tax cash into it, but you can withdraw it tax free. 

2. Forever tax free
You never pay tax on the money inside your TFSA, so you can invest in interest-bearing options like bond funds and GICs, or aim for growth in the form of investments like stocks. You can’t deduct the interest if you borrow money to invest in your TFSA, but the other benefits are attractive. When you take it out, it’s still tax free and it won’t affect your eligibility for income support programs based on earning levels.

3. What can go inside
The investments allowed in a TFSA include everything from GICs to mortgages. In addition to making cash deposits to buy investments, you can make in-kind contributions by transferring shares and mutual funds you already own into a TFSA.

4. Beware of over-contributing
You can carry forward the unused portion to the next year. But be careful. Many Canadians have been confused by the rules and face penalties as a result. 

5. Save and save some more
If you need spending money, go ahead and dip in. The chunk you take out gives you equal contribution room the next year.

6. Contributions carried forward
You can take advantage of your unused portions of the annual limit at any time in your life. 

7. Give a TSFA as a gift
Go ahead and surprise him or her with the gift of a TFSA contribution. 

8. Compounding power
Investment advisers love the charts that show you how by putting away a few dollars a month for a lifetime, you could be rolling in dough, unlike your colleagues who spent it on lattes. 

9. Canadian residents only
Non-residents of Canada aren’t eligible to open a TFSA. If you happen to leave the country after you have started one, you can maintain your existing account, but you can’t add anything to it as long as you’re a non-resident.

10. Low-risk strategy
Since you can’t claim capital losses in your TFSA on investments that have gone sour, it is best to opt for blue chip equities with high-yield dividends to fill up your TFSA.

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

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