Invest with TFSA
A tax-free "savings" account with investment profits
In Canada, many people tend to see TFSA as merely a savings account, but it has a hidden feature that many are not aware of – it can be transformed from a “tax-free savings account” into a “growth and investment account”! In the industry, we often refer to this type of investment as TFSA investment.
Many savvy clients have chosen TFSA investments early on to achieve tangible, long-term, and stable wealth appreciation.
However, before you begin, many people surely have numerous questions, such as what exactly is TFSA, how does it work, and how can investors make the most of TFSA investments to maximize their benefits?
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What is a TFSA?
Grow your money, tax-free
Congratulations! Opening a TFSA account is extremely easy. TFSA stands for Tax-Free Savings Account, a type of account opened in an individual’s name. As long as the applicant is at least 18 years old and has a valid Social Insurance Number (SIN), they can open a TFSA. This means that whether you are an international student with a study permit, a foreign worker with a work permit, or a Canadian resident with PR/Citizenship, you are eligible to open a TFSA and use it for investments.
You can use TFSA for various types of investments, including Segregated Funds, mutual funds, Exchange-Traded Funds (ETFs), stocks, bonds, and more.
While the deposits (principal) are not tax-free, the profits you earn from using TFSA for investments are completely tax-free. This includes capital gains, interest, dividends, and more.
The Canadian government sets an annual contribution limit for TFSA for each individual. In 2023, Canadian residents who are at least 18 years old can contribute up to a maximum of $6,500 to their TFSA account. The contribution limits vary each year, and here are the limits for previous years:
| Year | Limit |
|---|---|
|
2009 to 2012 |
$ 5,000 |
|
2013 and 2014 |
$ 5,500 |
|
2015 |
$ 10,000 |
|
2016 to 2018 |
$ 5,500 |
|
2019 to 2022 |
$ 6,000 |
|
2023 |
$ 6,500 |
|
2024 |
$ 7,000 |
Regarding TFSA Contribution Limits, its important to keep in mind:
- If you have remaining TFSA contribution room for the current year, you can carry it forward and accumulate it for use in the following years.
- If you turned 18 years old in 2009, even if you didn’t file a personal income tax return, benefit application, or open a TFSA, your TFSA contribution room continues to grow each year.
- If you turned 18 years old after 2009, your TFSA contribution room starts accumulating from the year you turn 18, and it accumulates each year thereafter.
- The investment earnings and fluctuations in value of your TFSA investments won’t affect your TFSA contribution room for the current year or the following years.
- A particularly advantageous aspect is that the capital appreciation and withdrawals from your TFSA account won’t impact your eligibility for government benefits such as the Ontario Pension Plan, low-income subsidy benefits, federal tax credits, and more.
- Lastly, and most importantly, never exceed your contribution limit, as the tax agency will impose a penalty of 1% per month on the excess amount.
- Regarding your specific TFSA contribution limit, you can log in to your CRA account to check.
Who needs investing in TFSA?
Start investing early. In Canada, as long as you’re 18 years old and have a valid SIN, you can use TFSA for investment. By starting to invest with TFSA from a young age, you’ll have more time to reap the benefits, maximize your gains, and not worry about taxation even if your returns increase.
Utilizing a TFSA account for investment allows not only lump-sum contributions but also the option of using systematic investment (investing a fixed amount into specific funds at regular intervals), such as investing $500 into TFSA for segregated funds every month. This approach is highly suitable for young professionals.
In addition to RRSP, TFSA is also a great option for securing the future. It not only offers elderly individuals a tax-free storage opportunity but also emphasizes that opening an account will not affect seniors’ eligibility for government assistance. Whether it’s the benefits obtained or withdrawals, the same applies. Furthermore, if seniors choose to retire early, RRSP might require waiting until 65+ to access funds. However, TFSA allows direct access, providing seniors with more flexible and diverse choices.
For individuals whose RRSP contribution room is already maxed out, TFSA investments undoubtedly offer a welcome opportunity.
In contrast to high-income individuals, this group can forgo the limited benefits of RRSP due to the tax-free nature of TFSA investments.
For example, individuals planning to buy a car, a house, or travel abroad in the future.
Using TFSA for investment not only has a low entry barrier but also has almost no restrictions on eligible individuals. Unlike RRSP, which primarily serves post-retirement life, TFSA is suitable for any stage of life.
If you want to learn more about the advantages of TFSA to strengthen your belief in choosing TFSA investments, feel free to schedule a consultation with us.
How can you open a TFSA?
It’s easy to open a TFSA. There are 3 main criteria:
- 18 or older
- Have a Canadian social insurance number
- Are a Canadian resident
What types of products can be held in a TFSA?
Let your money bring your goals closer
Despite its name, it’s not a typical savings account – it’s a place where you can put investments like mutual funds or segregated funds.
It’s versatile, so you can use it to save for a more immediate goal, like saving for a new car or a trip, but you can also use it to save for your retirement. Its partner, the RRSP, on the other hand, is just typically used for long-term investing.
Ai Financial offers this investment opportunity:
Segregated Funds
Segregated fund policies give you the freedom to invest while offering insurance protection to preserve your savings. With our choice of guarantees, you can expand your wealth and secure it at the same time.
You can purchase Segregated Funds using various accounts, including but not limited to TFSA, RRSP, RESP, Non-Reg, etc.
Common Misconceptions About RRSP
In reality, eligible residents can have multiple TFSA accounts at different financial institutions. While many choose Canada’s five major banks (RBC, TD, BMO, CIBC, and Scotia Bank), other institutions like insurance companies (Manulife, iA, Canada Life), fund companies, and trust companies also offer TFSAs. The key is to ensure your total contributions do not exceed the limit set by the Canada Revenue Agency (CRA).
This flexibility allows investors to manage their portfolios more effectively according to their needs and strategies.
Withdrawals and earnings from a TFSA do not impact any government benefits. No matter the amount withdrawn, it isn’t counted as personal income. Therefore, these withdrawals and earnings won’t affect low-income benefits or exemptions, including OAS (Old Age Security), GIS (Guaranteed Income Supplement), and various other benefits. This means TFSA earnings can increase wealth without impacting eligible benefits, making TFSAs a flexible and beneficial financial planning tool.
Here’s an example: Joelle had a $6,000 TFSA contribution limit in 2020. During the year, she made and withdrew contributions four times. She deposited $2,000 on April 25 and another $4,000 on May 16, fully utilizing her 2020 limit. On June 15, she withdrew $2,000. However, when she redeposited $2,000 on August 23, she exceeded her annual contribution limit, leading to over-contribution penalties.
Although it seems Joelle did not exceed her total contribution limit, she was actually fined by the CRA at a rate of $200 per month ($2,000 × 1%).
This is because TFSA withdrawal room cannot be reused within the same year; it resets in the following year. Therefore, when Joelle redeposited $2,000 on August 23, she over-contributed and incurred penalties.
Many people use their TFSA accounts for frequent stock trading since the earnings are tax-free. However, this can lead to complications. A few years ago, there was a case where an individual was audited by the CRA and had to pay over $400,000 in back taxes. The account holder turned an initial $10,000 investment into over $1 million through frequent trading. When they attempted to withdraw a large sum, the CRA flagged the account. Despite all trades being legal and transparent, the frequent activity was deemed business activity rather than saving.
The CRA does not provide specific guidelines on how many trades constitute business activity. Therefore, we recommend avoiding excessive short-term trading in your TFSA to prevent potential tax issues.
About TFSA, you might also want to know...
What are the differences between TFSA and RRSP?
TFSA and RRSP both offer tax advantages to help you achieve your savings and investment goals. When choosing to use either one, it’s crucial to understand the differences and advantages of these two types of accounts.
RRSP is specifically designed to provide you with income in retirement. Your annual contribution limit is based on your previous year’s income, with certain adjustments and an annual maximum limit. Your contributions can be used for tax deductions; however, withdrawals are subject to taxation.
TFSA is not specifically designed for retirement and can help you save funds for various goals. Your contribution limit is not tied to your income, and your contributions are not tax-deductible. You can withdraw funds at any time, and these withdrawals are tax-free. You can also re-contribute the amounts withdrawn from your TFSA in subsequent years without affecting your contribution room for those years.
Learn more about RRSP and how to make a choice >>>
PAD with TFSA - Grow Your Funds Automatically, Efficiently, and Effortlessly
A pre-authorized debit allows the biller to withdraw money from your bank account when a payment is due. Pre-authorized debits may be useful when you want to make payments from your account on a regular basis. On the specified deduction dates, the distributor automatically deducts the predetermined amount from the investor’s designated bank account and executes the purchase of the chosen fund.
By setting up a dollar-cost averaging plan with Ai Financial, you can schedule regular deductions from your bank account into your designated investment account (TFSA/RRSP/RESP/Non-Registered, etc.) on a weekly, bi-weekly, or monthly basis. Once you initiate this regular investment strategy, the long-term appreciation of your funds is likely to pleasantly surprise you.
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