TFSA Tax Free Savings Account
What is a TSFA?
TFSA’s offers Canadians a tax-sheltered option for saving money as of January 2009. It allows individuals, 18 years and older to contribute each calendar year and carry forward any unused contributions room from year to year. TFSA contributions are not deductible against your income, however and capital gains or investment income earned will not be taxed. Withdrawals will also not be taxed. The TFSA contribution room can change from year to year, as regulated by the government in power, as of January each year.
Benefits of a TFSA - easy to contribute
Unused contribution room can be carried forward to future years with no limits. Any withdrawals in a year from a TFSA will be added to the contribution room for the following year. Eligible assets are the same as those for RRSP.
How can you avoid over-contributing?
While TFSAs are a great way to maximize your savings, if you exceed your personal TFSA contribution room, you will have to pay a penalty to the CRA. To ensure that you don’t over-contribute, keep track of your account withdrawals and ensure that direct transfer procedures are followed. If you want to transfer your TFSA to another bank. here’s an example that show how contribution room is calculated when dealing with TFSA withdrawals and transfers.
TFSA withdrawals - timing is everthing
If you have contributed the maximum to a TFSA and you withdraw any of your money, you must wait until the following calendar year to contribute again. If you replace your withdrawal within the same calendar year, you will be assessed an over contribution penalty by the CRA. Here’s an example of how it works:
John has a maximum TFSA contribution room of $5,000 for 2010.
At the beginning of 2010 he contributes $5,000
In the middle of 2010 he withdraws $2,500
In November of 2010 he contributes another $2,500
John thinks that he has contributed a total of $5,000 to his TFSA in 2010, but according to the TFSA rules, he has contributed $7,500 – the total of his two deposits for the year. John used up his available contribution room at the beginning of the year, and has over-contributed to his TFSA by $2,500 starting in November, meaning that he will have to pay a penalty for those 2 months.
To avoid this penalty John should have re-contributed his $2,500 back into his TFSA in 2011 (as of January 1), when the withdrawn would have been added back to his available contribution room.
Who is eligible to open a TFSA?
Anyone over the age of 18 with a valid social insurance number (SIN) can open a TFSA.
How much can you contribute to a TFSA per year?
1. Starting in 2009, $5,000 was the initial TFSA contribution room available to adults 18 and over. Everyone is automatically entitled to the available annual contribution room each year, even without opening a TFSA or filing a tax return.
2. The annual TFSA contribution room is determined in January, in addition to any unused contribution room from previous years. There is no limit on the number of years that unused contribution room can be carried forward, and it will continue to accumulate from year to year. For example, if you only contributed $1,000 in 2009 and again in 2010, you have accumulated $8,000 in unused contribution room. This means that in 2011 you are allowed to contribute up to $13,000, assuming no subsequent withdrawals of the contributed amounts.
3. Any withdrawals from your TFSA are non-taxable and will also be added to your contribution room for the next year. However, if a withdrawal is re-contributed in the same calendar year, it is considered a new contribution by the CRA. Be carful not to over contribute.