One thing that most Canadians universally agree on is that we don’t want to pay more in taxes than we have to. While paying taxes is an unavoidable aspect of life, there are ways that you can reduce the amount of taxes that you pay while growing your wealth at the same time. In 2009, the Canadian government introduced the Tax-Free Savings Account, commonly called a TFSA, and since then Canadians from coast to coast have been benefiting from investing with the growth accumulating tax free. TFSA’s have indeed been so popular, that according to a StatsCan report, in 2019 Canadians contributed more to their TSFA’s than they did to their Registered Retirement Savings Plans (RRSP’s), and since then have never looked back.
While over 63% of Canadians have a TFSA, many people that we speak with do not fully understand this worthwhile financial tool, and many people do not realize the value of maximizing their TFSA contribution limits.
A little more on that later, but let’s start off with a quick recap on what a TFSA is and how these accounts work. TFSA’s were introduced to provide a vehicle for Canadians to set money aside tax free throughout their lifetime. If you are Canadian resident aged 18 or older and have a valid social insurance number, you are eligible to open a TFSA. In BC, we can open TFSA’s once you turn 19, but your contribution limits start accumulating the year you turn 18. Any amount contributed, as well as any income and investment growth earned in the account is considered tax free when it is withdrawn.
While this simple description probably makes sense, there are some details that are worth understanding. First off, there is a limit to the amount you can contribute to your TFSA annually.
- In 2023, this amount is $6,500, which is up slightly from the $6,000 maximum limit that was in place for 2019 to 2022.
- These contribution limits are important because if you do over-contribute to your TFSA, you are subject to an over-contribution tax. This tax is equal to 1% of the highest excess amount contributed per month that the over contribution exists, so it really adds up. As such, it is really important to know your TFSA contribution limits and stay within them.
If you do have not contributed the maximum every year, there is good news. The unused contribution room carries forward each year you do not use it. This means that if you were 18 or older in 2009 and have never contributed to a TFSA your unused contribution limit for 2023 is $88,000. If you have contributed, however not to the maximum, your 2023 TFSA limit is $88,000 minus any contributions previously made. These limits are very generous and considering the growth is tax free. This is what makes your TFSA an important part of your investment portfolio.
Another important thing to know about your TFSA is that you can withdraw funds at any time. There are no locked-in rules with TFSA’s and no minimum age that you can withdraw, so your money is easily accessible if you need it. The important factor is to ensure you have investments that can be liquidated easily if you think you might need access to the money. For instance, if you invest in a 1-year guaranteed investment certificate you will need to wait for the maturity date to access your funds. Getting good financial advice on the investments you choose to hold inside your TFSA is very important. If you do make a withdrawal, one of the great things about the TFSA is that you do not permanently lose that contribution room. In other words, you can re-contribute amounts that you have withdrawn in the following year (or years) and this contribution room carries forward indefinitely!
There are many investment vehicles that you can use within your TFSA, from simple savings strategies to very complex portfolios including stocks and bonds. We don’t want to spend too much time on specifics as your investment strategy is specific to you and this is a discussion you need to have with your trusted wealth advisor however it is important to note that your TFSA strategy can be created to meet your needs, using appropriate investments to achieve your individual goals.
Sounds great, right? Well, there’s no doubt that a TFSA is an important part of a complete financial strategy, however it is important to understand that the TFSA is not the only part of your plan. Earlier we mentioned that Canadians have contributed more to their TFSA’s than they have to their registered retirement savings plans (RRSP’s) in 2019, and that over 63% of Canadians have a TFSA. It’s encouraging that so many of us understand the value of a TFSA, however it is really important to understand that it is not a contest between contributing to a TFSA or an RRSP. Both investment vehicles have their merits. No doubt, a TFSA is an amazing savings vehicle, but it is not a replacement for an RRSP. Both your TFSA and your RRSP have an important role to play in your investment plan, and those roles are very different. In the simplest terms, the TFSA is a tax-free savings strategy, while your RRSP is intended to provide you with an income stream once you are no longer working. There are calculations that can be made for each individual to determine the best course of action when it comes to investing in RRSP’s and TFSA’s.
At Sea Glass Wealth, we understand TFSA’s, how they work, how they can fit into your financial strategy, and how we can make them work for you. If you would like to learn more, we would love to meet with you and discuss how we can help you map out a life you don’t want to retire from.
Are you dreaming of retirement or want to build a comfortable financial future? Get in touch with Tracey and Kristina and let’s make a plan together.
We are looking forward to the opportunity to meet you! For more information, please feel free to reach out.
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