- January 20, 2023
- Posted by: Simon Huften
- Category: Investing
A Tax-Free Savings Account (TFSA) in Canada is a type of savings account that allows individuals to earn tax-free investment income. Contributions to a TFSA are not tax-deductible, but any investment income earned within the account, including capital gains and dividends, is not subject to tax when withdrawn.
Eligible individuals can contribute to a TFSA starting at age 18, and there is no upper age limit. The annual contribution limit for a TFSA is set by the Canadian government and is subject to change. In 2023, the contribution limit is $6,500. If you have not contributed the maximum amount in a given year, the unused contribution room carries forward to future years, allowing you to contribute more in future years.
As a result, if you have qualified for a TFSA since they were introduced in 2009, the maximum that you can contribute (or deposit) to a TFSA in 2023 is $88,000.
Withdrawals from a TFSA are tax-free and do not affect government benefits, such as Old Age Security or Employment Insurance. Additionally, unused contribution room is not lost if you withdraw funds from your TFSA. However, if you withdraw funds and want to contribute them again in the future, you must wait until the next calendar year to do so.
TFSAs are flexible and can hold a wide range of investments, such as savings deposits, GICs, stocks, bonds, and mutual funds. This makes them an attractive option for individuals looking to save for a variety of goals, such as a down payment on a home, retirement, or a rainy day fund.
It’s important to note that if you over-contribute to a TFSA, you will be subject to a 1% per month tax on the excess amount. Additionally, if you have a TFSA and you open another one, any contributions you make to the new account will be considered excess contributions and will be subject to the 1% per month tax.
In summary, a TFSA in Canada is a type of savings account that allows individuals to earn tax-free investment income. Contributions to a TFSA are not tax-deductible, but any investment income earned within the account is not subject to tax when withdrawn. TFSA have a contribution limit, and withdrawals do not affect government benefits. They offer flexibility as they can hold a wide range of investments, making them an attractive option for saving for a variety of goals. However, it’s important to be aware of the penalties for over-contributing or having multiple accounts.
