Category Archives: TFSA Tax-Free Savings Account

TFSA Limit Increased to $10,000 and What it Means to Investors

TFSA Limit Increased from $5,500 to $10,000

Update April 27, 2015: The Canadian government published an official news release that Canadians can immediately take advantage of the proposed $10,000 Tax-Free Savings Account contribution limit.
Update April 23, 2015: The budget bill has not passed yet and must be passed in order for the TFSA increase to be approved and become law. So, I’d wait for Canada Revenue Agency’s Tax-Free Savings Account page to be updated before contributing that $4,500 amount.

If you were at least 18 years old back in 2009, and you have never contributed to a TFSA, you would have accumulated $41,000 contribution room.

Each year from 2009 to 2012 allowed for $5,000 contribution room.
Each year from 2013 to 2014 allowed for $5,500 contribution room.
This year started off with a contribution room of $5,500, until the announcement on April 21, 2015, that it as now be raised to $10,000. Going forward, each year, there will be $10,000 TFSA contribution room until further notice.

$10,000 maybe a lot for some people, and not everyone have the extra cash to invest that much. But we all need to start somewhere.

Photo Credit: kenteegardin from SeniorLiving.org via Compfight cc

Look within yourself and learn from experience to discover your unique investing style. Are you the type to put away a set amount every month, dollar-cost averaging, say $500 into the market via an ETF? One could do the same with individual stocks, except you might want to accumulate at least $1000 before investing to keep costs low. Banks typically charge $10 for each trade, which is about a 1% cost.

You Don’t Have to Invest $10,000 All At Once

There’s no one forcing you to contribute the $10,000, but any gains you get from a TFSA is tax-free, so it’d be illogical not to use it.

If you plan to put some funds in interest-producing vehicles, you can put that in a TFSA since interests are fully-taxed in the non-registered account. However, you’ll have to decide whether you save more taxes by placing interest-producing vehicles into a TFSA or if you put ETFs or stocks in a TFSA.

Of course, you can always create multiple TFSAs for the different types of investments. Just remember that the total contribution amount is still $10,000 for the year. Read More

Investing in the Tax-Free Savings Account

In a previous article, I wrote an introduction on the Tax-Free Savings Account (TFSA). In that article, I talked about who is eligible for the TFSA, what are the benefits, and how contributions and withdrawals work in the Tax-Free Savings Account. This article follows up with using the Tax-Free Savings Account as an investment tool.

Which Investments are Best Placed in the Tax-Free Savings Account?

A) Tax-Advantaged Consideration

If you place money in high interest savings accounts, bonds, and GICs, you should place those in a Tax-Free Savings Account first. Interests earned are taxed at the marginal tax rate. On the other hand, capital gains for stocks are taxed more favorably. Canadian eligible dividends are also taxed more favorably.

For US stocks, there’s generally 15% withholding tax applied to its dividends. If you have those stocks in the Tax-Free Savings Account, you can’t get the withholding tax back. That said, some investors argue that it’s still better to place US stocks in the Tax-Free Savings Account versus a non-registered account. In a non-registered account, you end up paying your marginal tax-rate for the foreign US dividends. Most of the time, the marginal tax rate is higher than the 15% withholding tax rate.
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Tax-Free Savings Account (TFSA) Explained

What is the Tax-Free Savings Account (TFSA)?

The Tax-Free Savings Account came into effect in January 2009. Since 2009, for each year, you get a contribution room of $5000. The contribution room was raised to $5500 since 2013. Every 5 years, the contribution room will be increased by $500.

At any time, you can withdraw funds from the Tax-Free savings account tax-free. If you withdraw funds from it, those funds can be put back into the TFSA next year. In addition, if you have some contribution room unused from earlier years, that contribution room is brought over to subsequent years.

If you have multiple Tax-Free Savings Accounts, the combination of those contributions cannot exceed your total contribution room. For example, you might have one for a high-interest savings account, and another for GICs.

What would you invest in your TFSA?
Photo Credit: kenteegardin from SeniorLiving.org via Compfight

Who is Eligible for the Tax-Free Savings Account?

The Tax-Free Savings account is available to Canadian residents 18 years and older who have a Social Insurance Number.

What are the Benefits of Using the Tax-Free Savings Account?

Essentially, all growth happening in the TFSA is earned tax-free, even at the time of withdrawal.

You can build an emergency fund in the Tax-Free Savings Account because you can withdraw from it anytime.

You can use it as a savings vehicle, such as for saving up for a vacation, a future purchase, or even for retirement. Make sure to be disciplined and stick to your original intent of using the money saved in the TFSA.
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