TFSAs: A Powerful Vehicle for Lifelong Investing

Whether you’re saving for your dream wedding, a rainy day, or a comfortable retirement, a TFSA can be an effective way for Canadians to meet their financial goals.

What is a TFSA?
A tax-free savings account (TFSA) is a registered plan that enables Canadians to set aside tax-sheltered savings on an annual basis. Canadians investors can open a TFSA and contribute up to $6,000 for the 2020 calendar year. Contributions to a TFSA are not tax deductible, but investments in your TFSA are allowed to grow tax-free. You do not pay tax when you take money out of your TFSA.
Despite what the name suggests, a TFSA is more than just a savings account – it is a nimble investment vehicle. Investors have the opportunity to build diverse investment portfolios with an array of different investments, including:

  • Cash
  • Guaranteed investment certificates
  • Mutual funds
  • Stocks
  • Exchange-traded funds

There are three key steps you must understand to invest in a TFSA: set up an account, contribute, and withdraw funds.

Setting up a TFSA
Canadians aged 18 years or older are eligible to open a TFSA – all you need is a valid Social Insurance Number. Visit your financial institution to ask about opening up a TFSA.

Making contributions
After you open your TFSA account, you can make contributions at any time and earn tax-free returns. The annual contribution limit is $6,000 for the 2020 calendar year. If you do not use the full contribution limit, you can carry forward the unused contribution amount to the following year. However, if you exceed your contribution limit, you will pay a penalty of 1% per month on the excess amount in your TFSA until it is removed.

Withdrawals from a TFSA
You can withdraw as much money from your TFSA as you wish without paying a tax or penalty. Also after making a withdrawal, investors can reinvest the outstanding contribution room the following year.

Should you invest in a TFSA?
If you are interested in a versatile way to help maximize your personal wealth and contribute to your savings, a TFSA might be right for you. Remember to do your research and speak to a registered financial advisor to verify whether this savings plan is a good option to help you secure a brighter financial future.

To learn more about TFSAs, visit IFIC’s Online Investor Centre at IFIC.CA.