Keep more of what you earn.
Intended to help Canadians save more, the Tax-Free Savings Account (TFSA) allows your investments to grow tax-free. There are several investments you can hold under a TFSA which can complement your current saving strategies and offer new ways to make your money grow.
Whether you're saving for a downpayment on a house, a well-deserved vacation, retirement or just for a rainy day, a TFSA can help you reach your goals faster.
How the TFSA works.
- Canadians aged 18 and older can save $5,500 in a TFSA in 2016. The total cumulative contribution room allowed is therefore $46,500 ($5,000 for each of the first four years, $10,000 for 2015 plus $5,500 for each of 2013, 2014 & 2016). The Federal Government has announced that in 2016 the contribution limit has been rolled back to $5,500.
- Contributions to a TFSA aren't tax-deductible but investment income earned within a TFSA, including interest, dividends or capital gains, is not taxed, even when withdrawn.
- Unused contribution room can be carried forward.
- Funds can be withdrawn at any time and can be put back later without reducing your contribution room.
- Income earned in a TFSA and withdrawals does not affect your eligibility for federal income-tested benefits and credits (e.g. Guaranteed Income Supplement, Canadian Child Tax Benefit).
- Contributions to a spouse's TFSA are allowed and TFSA assets can be transferred to a spouse upon death.
What kind of investments can I hold in a TFSA?
Your choices of investment options are typically as broad as those available to RRSP portfolios. You can hold cash in liquid high interest savings accounts, term deposits, mutual funds*, securities* and bonds*.
A TFSA should be part of an overall financial planning strategy that takes assets, liabilities, goals, income needs and risk into consideration. Since every individual's financial situation is different, our investment experts can help you understand your investment options and help you make an informed decision as to how to invest the funds in your TFSA.
The tax-free savings add up. Fast.
With traditional non-registered investments, taxes on your investment income can chip away at your earnings. Sheltering some of these investments in a TFSA will eliminate the tax you would otherwise pay. Let's look at an example comparing investing under a TFSA versus a regular, non-registered account. We'll use a one-time, $5,000 investment in a 5% term deposit assuming a 40% tax bracket.
|TFSA vs. Non-Registered Account†|
|Value After...||1 Year||5 Years||10 Years||20 Years|
|Tax-Free Savings Account||$5,250||$6,381||$8,144||$13,266|
|Additional Savings from TFSA||$100||$585||$1,424||$4,235|
† Example shown for illustrative purposes only.
As you can see, a single one-time $5,000 TFSA contribution builds 47% more savings than the same amount held in a regular account after 20 years. If a $5,000 contribution was made annually, the TFSA would deliver significant additional savings over that time.
A perfect fit for every life stage.
If you are just starting to save – whether it's for education, a car or a trip to Mexico – the TFSA can help you maximize your savings and tax-free income. As a new saver, it's an ideal savings vehicle whether you make monthly contributions or deposit a lump sum annually and you can withdraw and replace funds as needed.
As you acquire more assets, a TFSA is an excellent complement to every investment portfolio. During your peak earning years you want to achieve maximum benefit for the money you invest. With tax-free investment growth, it's perfect for those who have maxed out their RRSP contributions.
As you enter retirement, a TFSA becomes even more valuable, providing flexibility and convenience. Withdrawals from a TFSA are tax-free, unlike those from a RRIF, and any income earned won't affect any government benefits you're receiving. And you can keep contributing – there's no age limit, unlike RRSPs.