What is a TFSA?
A tax-free savings account lets you save up to $5,500/year1 for any purpose without paying taxes on the investment growth. Whether you’ll need those savings in a few years or well into the future, a TFSA is a smart way to save your money and see your savings grow tax free.
You should consider a TFSA if:
- You want to save money for an emergency fund (or any other purpose) and see your savings grow without paying taxes on the investment income
- You’re looking for a tax-efficient way to increase your retirement savings beyond what’s in your RRSP
- You have money in a regular savings account and don’t want to continue paying taxes on the investment earnings
How a TFSA works
- Canadians aged 18 and older can save up to $5,500 every year1 (as well as any unused contribution room from previous years) in a tax-free savings account.
- Your contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains you earn in a TFSA, will not be taxed, even when withdrawn.
- You can carry forward unused TFSA contribution room to future years.
- Subject to your investment terms, you can withdraw funds from the TFSA at any time for any purpose.
- The amount you withdraw is added to your contribution room in the next year, in addition to your annual maximum. If you’ve carried unused contribution room forward from previous years, you may still be able to add more than the annual maximum.
- Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits, such as Old Age Security.
- TFSA assets can be transferred directly to your spouse when you die without affecting his/her contribution room.
- A beneficiary can be named on almost all TFSA accounts,2 thereby helping avoid the cost and delays associated with probate and estate settlement.
Making a TFSA contribution
You can contribute up to $5,500 per year1.
You can carry forward any unused contribution room from previous years. Under TFSA rules there is no limit on how much contribution room you can accumulate or on the length of time you can accumulate it.
Example: If you didn't contribute to your tax-free savings account between 2009 and 2014 and you were at least 18 years old in 2009, you could contribute $41,000 in 2015.
Like the rules that govern RRSPs, a penalty of 1% per month will be assessed by the Canada Revenue Agency (CRA) on the amount that is over your total contribution room.
The CRA will confirm unused room and limits on a yearly basis. This information is available through "My Account" on the Canada Revenue Agency website.
Making a TFSA withdrawal
Subject to your investment terms, you can take money out of your tax-free savings account at any time and for any purpose. There are no restrictions on how much you can withdraw.
No, withdrawals are made tax free.
No, since withdrawals are not taxable, you don’t have to report them as income.
Money you withdraw can be re-contributed in the same year, as long as you have available contribution room. If you over-contribute you will be subject to a 1% penalty for each month you are in excess.
Your goals and the TFSA
The TFSA can help you get into the habit of setting aside money on a regular basis. Speak with your advisor about setting up an automatic savings plan directly from your bank account.
Finding extra money to put into a savings account may be hard when you're trying to pay off your mortgage, save for your child's education and put money aside for retirement. Your advisor may be able to help create a savings strategy incorporating a TFSA that meets your needs for today and tomorrow.
Saving money has never been as important as now. Investing in a TFSA will help ensure a healthy retirement income while protecting your assets from taxable withdrawals.
Speak with your advisor about ways to ensure you receive your retirement income in the most tax-efficient way while putting money aside in a TFSA for the unexpected.
Get helpful advice
With all the options that are available, guidance from an advisor can be a valuable part of your planning process. Talk to your advisor or find an advisor today to learn how a tax-free savings account fits into Money for Life, Sun Life Financial's customized approach to your financial and retirement planning.