What is a TFSA?
A TFSA is a tax-free savings account that allows taxpayers who are 18 or older and have a Social Insurance Number (SIN) to put money away in eligible investment vehicles and watch their savings grow tax-free over time. Taxpayers can utilize their TFSA funds for several purposes without paying taxes on interest income, such as buying a car, renovating a home, or taking a family trip.
How does it work?
Regardless of your earned income, you can move cash to a TFSA once a year to maximize your unused contribution capacity. Contributions to a TFSA aren't tax-deductible. TFSA withdrawals and returns are tax-free (interest, dividends, and capital gains).
Furthermore, the amounts you take from your TFSA in one calendar year boost your contribution capacity for the following calendar year. As a result, you can re-contribute all or part of the money you took out of your TFSA starting the year after you took it out. Unused TFSA contribution room is carried over to future years and accumulates.
Important: Don't contribute more than your TFSA contribution limit each year. If you do, you'll have to pay taxes on the excess, which you'll have to take out of your TFSA.
The difference between a Tax-Free Savings Account and a Registered Retirement Savings Plan?
Comparison: Tax-Free Savings Account /Registered Retirement Savings Plan
|Objective||Savings for short- and medium-term projects||Retirement savings|
|Contribution age limit||None||Age 71|
|Annual contribution limit||$6,000||18% of earned income, up to $21,000, less the pension adjustment|
|Contributions are deductible on your income tax return||No||Yes|
|Withdrawals are taxable||No||Yes|