The benefits of using Tax-Free Savings Accounts

Source: South Peace News, The; High Prairie, Alta.

Tax-Free Savings Accounts [TFSA] were introduced in 2009. Even though they've only been around for a relatively short time they're already the most used out of the majority of tax-sheltered accounts.

TFSAs are as simple as it gets. Contributions are made post-tax and they grow tax-free. They help you avoid tax on your investment growth.

The TFSA contribution limit is $6,000/year [in 2023 it may be different, talk to your advisor] for each person over the age of 18. Unused contribution room carries forward. To check your contribution room, sign into the Canada Revenue Agency [CRA] online portal or request a TFSA Room Statement from the CRA. There is no lifetime limit with a TFSA, your contribution room continues to grow every year.

TFSAs provide the biggest benefit when you put 'high-growth investments inside of your TFSA. Don't be fooled by the name "Tax-Free Savings Account", you can put almost any investment inside a TFSA. This includes, mutual funds, guaranteed investment contracts, stocks and bonds and segregated funds.

Think of a TFSA like an investment account where taxes do not apply. Put any investment inside your TFSA and investment gains become tax-free.

Withdrawals from a TFSA can be made at any time. Whatever you withdraw will get added to your contribution room the following year, so that tax-free space never gets lost. Make sure, though, to wait until the next calendar year to put it back in again. Otherwise, there is a fierce penalty for over-contributing. All this makes TFSAs great for retirement planning. It forms the cornerstone of the simple retirement plan.

Benefits Tax-Free Compounding: Investments inside a TFSA grow tax-free. This lets your investment compound faster without the drag of annual taxes.

Someone who contributes about $500 from age 18 to their TFSA each month for 40 years will have an estimated $766,189.29 in tax-free money at age 58! And you can keep contributing until you die if you don't need the money for retirement. It will then be part of your estate.

In your TFSA you can put your spouse as a contingent owner, so that your account moves into your spouse's account in case you pass away. The whole amount stays in a tax-free environment.

You can let a TFSA grow tax-free for your entire lifetime. RRSPs have forced withdrawal rates after age 71.

Withdrawals won't impact government benefits Making a withdrawal from a TFSA won't count as income. This means there is no impact on government benefits.

This is especially helpful for low-income seniors who receive benefits with high clawback rates, sometimes as high as 50-75 percent of the next dollar earned. 

No tax upon death because TFSAs are tax-free there is no tax upon death. This means you can transfer your assets to your children without any impact from taxes.


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