The Tax-Free Savings Account (TFSA) is an important investment vehicle that can be used for many different savings objectives over an individual’s lifetime. Since the introduction of the TFSA in January 2009, over 4.8 million Canadians have opened one or more TFSAs. To get a TFSA working for you, here are a few key points to remember:
A TFSA can be made up of an array of investments. Your TFSA can contain different types of investments, similar to those in a Registered Retirement Savings Plan, such as Guaranteed Investment Certificates (GICs), bonds, mutual funds and stocks. Contact your financial institution for more information concerning eligible investments.
TFSA contribution room accumulates every year. The maximum TFSA contribution room for an individual was $5,000 for 2009. For 2010 and 2011, your available TFSA contribution room is made up of three components:
- Your annual TFSA dollar limit of $5,000,
- The total amount of withdrawals from your TFSA made in the previous year.
If you contributed $5,000 in 2009 and only $2,000 in 2010, then you could contribute $8,000 in 2011. This amount includes the $3,000 unused contribution room from 2010 plus $5,000 for 2011.
If you contributed $5,000 in both 2009 and 2010 and then withdrew $10,000 in November 2010, your contribution room for 2011 would be $15,000. This is calculated using your annual dollar limit of $5,000 for 2011 plus the $10,000 withdrawal made in 2010. Withdrawals are not added back to your contribution room until after the end of the year.
It is important to note that while you can open more than one TFSA, your total contributions in a year cannot exceed your available TFSA contribution room.
Income earned in a TFSA. Income such as interest, capital gains and dividends accumulates tax-free in your TFSA and withdrawals made from your TFSA are not taxed. Except for certain transfers, any withdrawals from your TFSA, including the income earned, will be used in the calculation of your TFSA contribution room for the following year.
Transfer your TFSA directly from one financial institution to another. If you have more than one TFSA, you can transfer funds directly from one of your TFSAs to another of your TFSAs without affecting your contribution room. The direct transfer must be completed by your financial institutions. If you withdraw funds on your own from one TFSA and contribute those same funds to another TFSA, the re-contribution will be considered to be a new contribution. As a result, your TFSA contribution room will be affected and you may be subject to a tax on excess contributions.
TFSAs are different from regular savings accounts. It is possible to make multiple contributions and withdrawals throughout the year to your TFSA like you would with a regular savings account. However, your total contributions in a year cannot exceed your available TFSA contribution room for the year or you would be subject to a tax on excess contributions. This tax is based on the total contributions made to your TFSA in a year and not on the account balance at the end of the year.
If you deposit more than your contribution room you will be subject to tax. If, at any time, your contributions in a year exceed your TFSA contribution room for the year, you will be subject to the TFSA tax on excess contributions. You are liable to a 1% tax per month on your highest excess TFSA amount in each month. This tax will accumulate until the excess amount is withdrawn. If you have excess contributions you should withdraw the funds immediately to avoid any additional tax.