What you need to know about TFSAs

Although tax-free savings accounts (TFSAs) are very popular, there are still are a lot of myths about them--and some are harder to dispel than others.

Here's what you need to know to get the most out of this investment vehicle. 

Withdrawals are tax-free. 

All withdrawals--capital and interest--are tax-free. This means you can withdraw funds from your TFSA as often as you want without tax penalty. 

Withdrawals aren't added to your annual income, so you won't risk your eligibility for certain government benefits and credits, like the Canada Child Benefit or the GST/HST tax credit, which are based on your declared income. 

TFSA contributions aren't tax deductible 

Unlike RRSPs, you can't deduct your TFSA contributions. There's no need to include your TFSA tax slips with your income tax return. In fact, it's because contributions aren't deductible that withdrawals are tax-free. 

Anyone can open a TFSA 

As of 2009, all Canadian residents 18 and older can have a TFSA, whether they're students, employees, self-employed workers or retirees. And you can carry forward any unused contribution room to the next year. If you never made any contributions to a TFSA, the 2019 limit is $63,500. 

Having more than one TFSA doesn't increase your contribution limit 

The TFSA contribution limit is per person, not per account. In 2019, the limit is $6,000. It's up to you to decide how and where to invest that amount. There are a number of investment options that you can set up for automatic transfers and that will allow you to diversify your TFSA portfolio. Your investment begins growing right from the first day and is easy to fit into your budget. Just keep in mind that any excess contributions are penalized at the rate of 1% a month. 

Withdrawals are added back to your contribution room 

All withdrawals are added back to your contribution room the following year. So all amounts withdrawn increase your contribution limit. Let's say you contribute $6,000 in January and withdraw $3,000 in June; if you've reached your contribution limit, you have to wait until next January to re-contribute that $3,000. That's why you need to keep an eye on your deposits and withdrawals, especially if you make frequent withdrawals.

TFSAs are popular because they're so flexible. But they aren't a regular savings account. To get the most out of your TFSA (i.e., earn tax-free interest), your contributions need time to grow. That means they need to be invested in a diversified portfolio over the medium- or long-term, based on your profile. 

TFSA basics 

  1. TFSAs are ideal for medium- and long-term savings goals. 
  2. Try to keep withdrawals to a minimum. 
  3. It's a flexible plan, but you need to make sure you stay within your contribution limit.