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By Mark Seed, myownadvisor
Special to Financial Independence Hub
A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think.
Now that we’re into the start of a new year (Happy New Year!) here are some great things you can do with your TFSA.
TFSA Backgrounder
The TFSA was first introduced in the 2008 federal budget.
It became available to Canadians for the 2009 calendar year – as of January 1, 2009. Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.
But the “savings” word in the name is very misleading, no?
Correct.
Since account introduction in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before.
While this account is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.
As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. Consider it like an RRSP account in reverse.
For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!
How good is that?!
Let me tell you … here is summary of many great account benefits:
- Capital gains and other investment income earned inside the account are not taxed.
- Withdrawals from the account are tax-free.
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, like future Old Age Security (OAS) income.
- Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
- While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA. Do it without any income attribution!
- TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. More details below for you.
- The annual contribution limit is indexed to inflation in $500 increments, that happened in recent years …. and more!
I’ve got my preference for which account I focus on for wealth-building purposes (related to the RRSP vs. TFSA debate, including what account I would suggest you max out your contributions to first) but let’s compare each first:
|
RRSP |
TFSA |
| A tax-deferral plan. | A tax-free plan. |
| Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution. | Contributions are made with “after-tax” dollars.
|
| Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate. | Contributions are not tax deductible; there is no refund to be had. |
| If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit. | |
| If you make a withdrawal, contribution room is lost. | If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year. |
| Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal. They are treated as income and taxed at your current tax rate. | Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal. |
| Since withdrawals are treated as income, withdrawals could reduce retirement government benefits. | Withdrawals are not considered taxable income. So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals. |
| You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year. | You can contribute to a TFSA after age of 71. |
| The Summary: part of your RRSP is borrowed money (i.e., you owe the government taxation.) | The Summary: all of your TFSA is your money. |
Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle to focus on first at any income level even though I contribute to both every year. All the money in the TFSA is mine to keep, grow and manage with no taxation withdrawal consequences.
Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:
TFSA contribution limit 2009 to 2025:
| Year | TFSA Annual Limit | TFSA Cumulative Limit |
| 2009 | $5,000 | $5,000 |
| 2010 | $5,000 | $10,000 |
| 2011 | $5,000 | $15,000 |
| 2012 | $5,000 | $20,000 |
| 2013 | $5,500 | $25,500 |
| 2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016 | $5,500 | $46,500 |
| 2017 | $5,500 | $52,000 |
| 2018 | $5,500 | $57,500 |
| 2019 | $6,000 | $63,500 |
| 2020 | $6,000 | $69,500 |
| 2021 | $6,000 | $75,500 |
| 2022 | $6,000 | $81,500 |
| 2023 | $6,500 | $88,000 |
| 2024 | $7,000 | $95,000 |
| 2025 | $7,000 | $102,000 |
I also know some couples who have their combined TFSA assets worth more than $400,000 in value.
Pretty impressive tax-free money!!
Q&A with Mark – What has worked for me/us over the years?
Well, we’ve bought various assets, namely Canadian stocks and ETFs over the years.
To date, we have avoided any TFSA withdrawals. Instead, like I referenced above, we use our TFSAs for owning equities and wealth-building purposes.
Q&A with Mark – What types of investments can you own inside the TFSA?
Thankfully lots!
Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings. You can own a number of different types of investments inside the TFSA: Continue Reading…
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