A TFSA allows you to save for all your shorter- to longer-term goals, from an annual vacation to buying a home, on a tax-free basis. We break down the basics of a TFSA to help you navigate this investment account option.
What is a TFSA?
A Tax-Free Savings Account (TFSA) is a type of investment account that allows you to save and grow your money tax-free.
How does a TFSA work?
Any Canadian resident with a Social Insurance Number who has reached the age of majority in their province can open a TFSA, and you can open more than one account.
Like a registered retirement savings plan (RRSP), a TFSA can hold various investments, including mutual funds, exchange-traded funds, stocks and bonds. Your contributions to a TFSA are not tax-deductible, but your savings grow tax-free. Withdrawals you make are also tax-free and can be made at any time.
Pros
The key benefit of a TFSA is that your investments inside the account grow tax-free; in other words, income and growth aren’t taxed.
TFSAs offer flexibility and can be used to save for any financial goal, especially in the shorter term. Unlike with an RRSP, you don’t have to pay taxes on withdrawals, and you can also re-contribute any withdrawals the following year.
If you don’t contribute the maximum amount allowed in a year, any unused contribution room is carried forward to future years.
Cons
Your contributions to a TFSA are not tax-deductible so that you won’t receive an immediate tax benefit (i.e., a potential tax refund on the contribution).
If you withdraw from your TFSA, the withdrawal amount is added to your unused contribution room, but not until the beginning of the following year. That means you will usually have to wait until the new year before you can re-contribute any withdrawals.
There is no option for a TFSA spousal plan, although you can give your spouse (or common-law partner) money to invest in their own account without having the income earnings from that money attributed back to you.
Source: fidelity.ca
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