Tax Free Savings Accounts

When the Tax Free Savings Account came out, we all jumped up and down, clapping our hands together in glee. The rules were hashed and re-hashed hundreds of time in the media and consumers STILL managed to go offside. Wow! For those of you who still haven’t opened up your TFSA, here are 9 things you need to know.

1. You have to be a Canadian residents and 18 or older. (I actually saw an article recently where someone advised parents to open one of these up for this kids. Not until they’re 18!)

2. You can save up to $5,500 up $500 more this year. Limits are going to be indexed to inflation in $500 increments, so watch for more increases in limits over time. You can have as many TFSAs as you wish, but the $5,500 contribution limit applies across all accounts.

3. Contributions are NOT tax deductible.

4. All the income earned inside a TFSA is earned tax-free.

5. If you can’t save $5,500 this year, your contribution room can be carried forward to future years. So if you can only stick $2K in for 2013, in 2014 your limit will be $9,000 ($5.5K for 2013 and $3.5K carried forward from 2013.)

6. You can take money out of your TFSA at any time for any purpose, without losing the contribution room. HOWEVER if you take money out in one year, you canNOT put it back until the following year.

7. You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds.

8. You can, and should, make a beneficiary designation (everywhere in Canada except Quebec) on your TFSA to avoid probate costs.

9. You can contribute to your spouse’s TFSA without affecting your own contribution limits and without any tax attribution.

Follow the rules carefully, especially the one about taking money out of a TFSA and then putting it back in. If you try to return money to your plan too soon and you’ve already reached your limit for the year you’ll be hit with an over-contribution penalty.

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Gail Vaz-Oxlade

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34 Responses to “Tax Free Savings Accounts”

  1. A little confused over #5… I thought that when you opened your TFSA, that you also carry forward your contribution room from previous years not contributed. Therefore, instead of $9000 by 2014, wouldn’t they have much more?

  2. Is the beneficiary designation for a TFSA different than any financial designations in a will?

  3. Sorry, just to clarify. In example 5 above, wouldn’t they have $29000 left in contribution room by 2014 ($25500 +5500 for 2014 – 2000 put in)? Assuming that they met qualifications to contribute in previous years… I guess an 18 year old today would have $9000 in room next year..

  4. @Cas you are correct. I think she was simplifying.

    Being young and not making much money to generate RRSP contribution room I LOVE the TFSA! Paying tax on the money upfront when I’m in a super low tax bracket and knowing I can get at it tax free later is much better than having it sit in a non-registered account waiting for me to make enough $ to get RRSP room and for it to make sense to take those RRSP deductions when I’m in a higher tax bracket later. Plus it is in the same set of investments as the RRSP, so it isn’t at a disadvantage. I won’t even come close to maxing it out this year, but it is nice to know that the money rolls over and the space will be there still when the money comes rolling in down the line.

  5. @Cas

    Correct, re #5

    If the person was at least 18 the first year they could have contributed (2009) then by 2014 they would have $27,000 in contribution room. (4* $5000, + 2* $5500, – $2000).

  6. Can anyone confirm for me? I *thought* that our information re:contributions for a given year were to be included on our Notice of Assessments – somewhat along the lines of our Home Buyers RSP information. But I have not seen anything and wondering if that information was not correct. I have contribution room to bring forward but truly its not clear how much.

  7. Last year (or was it the year before), CRA sent us a statement (maybe on the notice of assessments) listing our TFSA contributions — it was wrong. It was not current — I wonder if the bank was extremely slow in reporting our contributions (the sad part — all of it is in one account with RBC’s direct investing contributed in the spring — it’s not like it’s multiple financial institutions). If I went off the CRA thing, I would have overcontributed. So my suggestion is to keep track of it yourself!

    I’m hoping in the future the system will improve.

  8. avatar Christine Says:
    February 5, 2013 at 9:53 am

    If you read the CRA website re TFSAs they make it very clear that YOU are responsible for tracking your contributions.

    And, check out the over-payment penalties. Last I read, the penalties wasn’t based on just the over-payment, but on *all* your contributions for that year. (I may be wrong but I remember thinking that it was really not fair.)

  9. I am fairly certain that your TFSA room grows when you earn interest. That way if you max it out, your investments build interest, and then you remove your money you can return the initial amount plus the amount of interest at a later date.

  10. @ Elizabeth

    Yes that is correct, so if you turned $5000 into $100,000 and then withdrew it, you could put $100,000 back in the NEXT year + the allowable contributions for that year.

  11. We just dumped some catch up money into the hubs TFSA this year and while we were there changed from a simple beneficiary to a “successor” and a “beneficiary”. A Successor Holder will take over your policy in the event of your death. Any income earned from the original holders date of death may be sheltered from tax. The Successor Holder designation will override the beneficiary. This is new and was effective Jan 19, 2013.

  12. Is there ever such a thing as too much savings? DH sees RRSP, TFSA and RESP maximums as savings targets, so we’re maxed out but I wonder if we’re not oversaving and underliving? We’re 41 and 47 with 3 kids and a $540K portfolio, an affordable mortgage and no pensions. I have no interest in early retirement, sounds dull to me. What do you think?

  13. Natalie, I worry about the same thing (no kids so no RESP).

    I suppose the good news is the TFSA is so flexible you can switch it from tomorrow’s money to today’s money in any good plan, and keep all the interest. Just use it to save for vacation instead of retirement.

    I think the key is to know what kind of retirement income you are on track for. You could do so well in saving that your tax bracket doesn’t decline and even goes up in retirement. It’s not recommended that RRSP withdrawals be taxed at a higher rate than the original income that produced the deposit.

    It is all the sort of thing that should be discussed with an advisor. You might be better off investing outside of the RRSP to save.

    As for underliving, I just have to remind myself to get out there and have fun. Gail recommends setting aside a lump sum every month that you have to spend on fun, if you are prone to being overly frugal. Probably a good habit to be in if you plan to even be working part time after turning 65.

  14. I don’t get what is so great about these accounts. First, you already paid tax on the money you are putting into the account. This sounds like a glorified bank account. ????? You should be able to put away that money yourself….not having the government watch you do and keep tabs onl it. Second, you get penalized if you over contribute. Duhhhh!! Why would you over contribute if you know your getting penalized. Lightbulllb!!! Please if anyone could enlighten me as to why you would do this….I would love to hear it…. thanks in advance…

  15. @Cas

    You are correct, but I think Gail was just using the example of the two years of 2013 to 2014, to show that you can carry forward, she was not talking about since the TFSA came out.

    I have only starting contributing to the TFSA last year, but as my debt goes down my contributions go up. I have a post it note on my computer showing me the total contribution room.

  16. @Charlene

    The big benefit to the TFSA is you do not get taxed on the interest that is gained from the savings.

    From any other savings/mutual funds/GIC that is not registered ie RRSP, RESP, TFSA, etc you have to pay tax on interest gained or your profits

  17. There are many “annuity formulas” out there that can help you derive an acceptable amount to save for would be. Many of them are quite straightforward (eg. desired annual income times a certain multiple provided interest and inflation are assumed). However, that’s where the discussion comes into play – interest/inflation rates, there are no crystal balls are far as I know and that’s why you always here such wide ranges of portfolio values.

    In the end all these accounts are to entice the average person to save. We put our money into the “markets” and in return we get some sort of tax break.

  18. @Charlene. First the govt does not keep track of the account, just how much is put in or taken out. Second it s a great benefit for low income earners, as any amounts taken out are not taxable and does not need to be reported on your tax return. And since the income on your tax return is what determines alot of gov’t benefits, that is a great advantage for people when they retire to qualify for benefits like GIS. In Alberta you can qualify for Alberta Seniors Benefit (similar to GIS), dental and optical assistance and Special Needs Assistance, if your income is below the threshold.

  19. Great article Gail. I just came into some money from a settlement. We used some to pay off all our consumer debt and the rest we put in investments within our tfsa. We will end up using this money next year to help me stay at home with our daughter. I wanted something that would earn some interest safely, but that I couldnt easily access online to avoid blowing through our savings.

  20. And an uncommon wrinkle. For anyone who is a dual citizen (Canada and US) TFSAs are not recognized by the IRS. There is no tax treaty for them like there is for an RRSP. TFSAs are treated as a “foreign investment” and can really complicate an IRS filing (must be done every year regardless of where you live in the world). This skunked a lot of dual citizens looking for investment options in Canada.

  21. @ Delores
    Successor Holder and Beneficiary designations/rights, etc vary quite a bit from province to province. Even Gail’s note that beneficiary designations should be made separately from estate is not really applicable in AB, as there is a max of $500 probate fees (unlike BC, ON that have fees based upon size of estate). So no real advantage to designations, and came make evening out inheritances to various beneficiaries very difficult.
    Also, there are some other rules that different institutions have regarding beneficiaries: one I dealt with would finally accept my 2 children as direct beneficiaries, but got interesting if 1 had passed away. Instead of that child’s portion going to their children, ALL went to other original beneficiary.
    After going over all with my lawyer for new will, all best to go to estate, better able to cover all eventualities.

  22. @M….do you know where I can find more info on this? I have dual citizenship, but have never lived or worked in the U.S, so I am unclear on what they want me to file. Are you saying that having the TFSA complicates this even further?

  23. @pwrrkc6, First my apologies if my response scares you but I urge you to RUN, not walk to a reputable accountant for advice. The IRS only recognizes citizenship and regardless of where you’ve worked/lived you are required to file with the IRS annually. You may not owe any taxes but you must report foreign income earned and gains on any investments. The most recognized set of ancillary forms are “FBAR”. Failure to file/report is a civil or criminal penalty and the IRS can go after you aggressively. And Revenue Canada (in theory) may be required to collect money on behalf of the US government. My fam and I have lived in Canada for 15 years and faithfully filed using an accountant specializing in this process and still we were issued a $10,000 civil penalty. The most common red-flags are TFSAs and RESPs. Luckily, we prevailed against the IRS but it took 10 months of haggling. Google “dual citizens and the IRS”. It will turn your stomach. Good luck.

  24. @M, Thank for your response. Why were you penalized if you faithfully filed?

    We have talked with several people and are aware of the horror stories, but have yet to find reputable information on it. Hmmmm…now to find a reputable accountant for advice!

    @Gail, do you have any advice on this? I know the finance minister came out with a statement a while ago, but haven’t heard much about it since?

  25. I have a question, if my TFSA is maxed out, being in the lower tax bracket, am I better off putting my retirement money in the RRSP or non-registered investment?

  26. We didn’t get penalized after all. There is rather poor communication between tax specialists in both countries and it seems that the IRS didn’t like the format of the FBAR form used by some accountants here in 2010. So we were issued a civil penalty for not following the rules. We gave the accountant “tax power of attorney” for our file so he could talk to to the IRS on our behalf. Eventually, the accountant heard (we never did receive a response) that it was a “technical error on the part of the IRS.” I assume that’s as much of a mea culpa we’ll ever get. And we’ll get to restart the process again for 2012 next month…
    I don’t think ministers or ambassadors are having much luck changing this situation. Let’s hope someone on the US side works to improve this.

  27. Question about taking money out and putting it back in. I am low income, do not contribute the maximum amount at this time. I use my TSFA as an emergency fund and this year took some out for car repairs. I put it back within a few months, not realizing the rule about putting it back. But even with monthly contributions and paying back what I took out, I will still be under the maximum contribution limit. Will I be penalized for putting the money back in the same year?

  28. K: No you won’t be penalized because you still had contribution room.

  29. @Aud, thanks for the info!

  30. You can easily check how much contribution room you have anytime by going here to the CRA website: http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/qckccss/menu-eng.html

    You’ll just need to have your previous years’ tax forms handy, so that you can answer the logon questions, then you’ll see it pretty much instantly!

  31. The TFSA is quite frankly, amazing. It locks you in to saving but still gives you some level of flexibility for some of life’s big expenditures like a house, education, car, whatever. People shouldn’t get carried away with the flexibility and treat the account like a regular savings account by making withdrawls from it each year.

    Put your money in a TFSA, invest it in something and watch your money grow over the long term.

    One thing Gail didn’t mention is that if you incur a loss on an investment within your TFSA, you can’t claim it as a capital loss, so be careful!!

    Don’t forget about the RRSP too!

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  33. My husband is a us citizan and this is the frist year he works in canada. We started looking for an accountant that can help with filing in the states. Is there a site on reputable accountants for filing both in canada and the us?

  34. Do different banks have different interest rates for TFSA? It sounds scary to have to find this out. Can’t I just get a CSB or are those all different from bank to bank too?

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