Understanding Tax Free Savings Accounts

January 11, 2023

Making informed decisions about where to invest your hard earned money is central to achieving your financial goals. Many people find it a challenge to understand the features and benefits of various savings options, which makes it tough to decide which option to choose. The Tax Free Savings Account (TFSA) was introduced by the Government of Canada in 2009 and is an important investment planning tool to consider.

What is a TFSA?

A TFSA is a savings strategy designed to assist and encourage Canadian residents to increase their savings. Eligible investments can be held within the TFSA with the growth being tax sheltered. This means it is not reportable on an individual’s income tax even when the principle and/or growth is withdrawn. Any contributions made to the TFSA are not deductible for income tax purposes.

Benefits of a TFSA

Tax Free Growth – Gains on the investment are tax sheltered from income tax reporting while held within the TFSA and when withdrawn. The higher the earnings, the more benefit of tax sheltering the growth and increasing net worth.

Flexibility – TFSAs can support saving for multiple purposes including short term goals, mid-term goals like saving for the down payment of a home and long term such as supplemental savings for retirement. Funds can be removed anytime (within limits of the investments selected) and the withdrawal value is re-added to contribution room for the following calendar year.

Estate Planning – An account holder can add a beneficiary to a TFSA. This can be a spouse, children or other people important to the account holder. The balance of the TFSA can be distributed to the beneficiary directly, should the account holder pass away. If the beneficiary is the spouse, the TFSA balance can be allocated to the spouse’s TFSA and does not affect their individual TFSA contribution limit.

Who can make TFSA contributions?

Every Canadian citizen with a valid Social Insurance Number is eligible to make TFSA contributions - beginning in the calendar year they turn 18 years of age. If you become a non-resident after opening a TFSA, the monies can remain within the existing TFSA however no further contributions can be made for that time period. TFSA contribution room will not accumulate during any year you are a non-resident of Canada throughout the entire year.

How much can be contributed to a TFSA?

The Government of Canada announces the annual TFSA contribution limit. TFSA contribution room starts in the year a person turns 18 years old and it accumulates every year thereafter. Any unused contribution room can be carried forward every calendar year. The total amount withdrawn from a holder’s TFSA within a year is added to the individual’s contribution room for the following year.

What happens if an over-contribution is made to a TFSA?

A monthly 1% penalty is charged on the amount that is above the individual’s contribution limit beginning in the month the over-contribution is made and until the over-contribution value is removed.

How are contributions invested?

The most common investments available within a TFSA are mutual funds, stocks, bonds, GICs and cash. Depending on the account holder’s purpose for the monies and assessing the investor’s objective, risk tolerance and time horizon will determine which investment is most appropriate.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.