What Is A TFSA - Tax Free Savings Account

The Canadian Tax Free Savings Account (TFSA) Is The Best Way To Build Wealth & Collect Dividends Tax Free.

A Tax Free Savings Account (TFSA) is a registered investment or savings account that allows for tax free capital gains and dividend. The amount of money that can be contributed to a TFSA is limited each year & will be listed by the CRA. A TFSA can be used for any savings goal and withdrawals can be made free of tax.

How Does A TFSA Work?

How a TFSA works is very simple. You open a TFSA, deposit money and hopefully watch your money grow. One of the greatest features of the TFSA is their flexibility in terms of when you can withdraw your money. Unlike an RRSP, you’re free to withdraw at any time without penalty.

The maximum you’re allowed to put into a TFSA each year is known as the contribution limit and it varies from year to year. It’s a good idea to take a gander at this year’s limit and past limits before you open a TFSA and start contributing. That’s because over contributing comes with a nasty little penalty — 1% of the excess contribution every month until it’s withdrawn.

When you do withdraw money from a TFSA, the amount you take out is added to how much you can contribute the following year. For example, withdrawing ​5,500—plus $5,000. And TFSA contribution room doesn’t disappear if you fail to contribute in any given year, It just rolls over into the next year.

Here is how my investment accounts and how I have used the TFSA

TFSA (withdrawals & over contributions)

  • Don’t over-contribute; if you do you’ll be assessed a 1% penalty on the excess contribution every month until it’s withdrawn.

  • Understand TFSA contribution rules; if you hope to replace money you withdraw from your TFSA, you’ll have to wait until the year following your withdrawal to earn that contribution room back. 

TFSA Advantages 

A TFSA “tax-advantaged account,” meaning the government provides tax breaks for those who use them as an incentive for saving for retirement or access to dividend income tax free. TFSAs are considered tax-exempt. While contributions to a TFSA earn you no immediate tax breaks like RRSP contributions would, you will however receive big breaks in the future, since all investment gains will not be subject to any taxes. In other words, since you already paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out.

How to open a TFSA

Any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to is reach out to a financial institution who offers TFSAs and provide your SIN and date of birth. It’s likely they’ll ask you for supporting documents like a birth certificate to prove you are you who you say you are. Unless you're trying to impersonate someone else, the process shouldn’t take any more than ten minutes to complete.

Consider Our Complete Walk Through To The TFSA & RRSP

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