WHAT CANADIAN’s NEED TO KNOW ABOUT TFSA?

WHAT IS TFSA?

TFSA stands for TAX FREE SAVINGS ACCOUNT.

You enjoy tax free growth on your money invested under TFSA Account. TFSA is a LEGAL way to AVOID FUTURE TAXES, that makes it the most desirable account to invest money.

A TFSA account is just like a bucket and you can put any kind of investment inside that bucket, it can be Index Funds, Mutual Funds, GIC or simply High Interest Saving account type.

What is the main difference between RRSP and TFSA?

RRSP vs TFSA

RRSP stands for Registered Retirement Savings Plan. It means No Taxes at the Deposit; But Taxed at Withdrawal.

You save some money now because any money gone to the RRSP account is TAX FREE but it doesn’t mean that you won’t pay taxes. You will pay taxes at the time you withdraw that money.

TFSA means Deposit is done with after-tax money and no taxes on withdrawal. You will pay your taxes as you normally do and deposit after-tax money to your TFSA account.

Just imagine you are investing $5000 every year in TFSA for 30 years and it grows to $676,000 (at 8%) over time, now you DO NOT have to pay any taxes on this money. TA DA!.

Now imagine putting the same money $6000 ($1,000 more because you save money by not paying taxes) in RRSP for 30 year and it grows to $810,000 dollars over time. It is $125,000 more but you must pay taxes on total $810,000 during the retirement period. I don’t know about you, but I take the deal with NO TAXES.

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Who can invest in a TFSA Account?

Anyone who is 18 years old with a valid SIN (Social Insurance Number) is eligible to open a TFSA Account.

There can be a 1% tax for each month someone living outside Canada. Check out for more details.

At what age should you open a TFSA Account? And Can you open a TFSA account for your kids?

Ideally, earlier the better. But there is a restriction that you can open TFSA once you are 18-year-old.

You can open a TFSA account for your kids once they turn 18. Therefore, I will do one thing for sure for my kids is to open up a TFSA account for them as soon as they turn 18. Above all, It can be simply $50-$100 per month investment but it will grow so much with time because they are starting it so young.

Time is money, don’t forget that.

I am 23 and making $35k per year, is TFSA for me?

TFSA is perfect for you because you are not in the high-income bracket and there is no need to reduce taxes, so in conclusion choosing TFSA over RRSP will be the best choice for you.

You may want to save for your future house or wedding and it’s a good idea to keep money in TFSA invested in Index stocks\mutual funds and grow them Tax free. You should just keep some emergency funds in savings and invest the rest under TFSA to save future taxes and take it out whenever needed. Just make sure to choose your investment profile according to the duration of your investment.

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What are the main key points one should look up while opening TFSA?

1.      What is your available TFSA contribution limit? If you have not invested earlier then you probably have a big contribution limit available.

2.      How you want to invest your money inside TFSA. You should find out your risk level and decide how you like to invest your money. Just do not get into analysis paralysis mode and never start the investment. Start something small and invest in something you understand and then gradually increase your risk level.

Can international Students or Temporary workers open TFSA in Canada?

Temporary residents on work permit or International students living in Canada with valid SIN number are eligible to open TFSA accounts.

Are there any monthly or yearly fees to manage TFSA?

There is no direct fee to open or manage TFSA but there must be some fees associated with the investments done under TFSA. These fees will be completely different from one investment to another but mind you, those investment related fees will always be there regardless how and where you invest your money. You can reduce your fees by choosing the right investment (For example, Index funds have much lower fees over Mutual funds).

What is the minimum investment required?

There is no minimum investment requirement, you can invest as small as you can, but sometimes your investment like stocks or Mutual funds may have some minimum requirements to invest in certain funds.

Is there Maximum limit for TFSA deposits?

This is probably the most important point about TFSA, there is a maximum limit on how much you can invest in TFSA each year. For 2021, the annual contribution room is $6,000, it used to be $5,000 for some of the prior years.

But importantly, it is cumulative, which means you have all the total room available for you if you haven’t used your TFSA room for the last few years since 2009 (year it started) or maybe you were using part of it. Anything you didn’t use is available for you next year and it keeps adding up.

What happens if you invest more than your TFSA contribution room?

You will not like this part now!

There is a penalty of 1% for each month money stays in your account until you withdraw it. Ideally, you should wait till next year to have an extra contribution room available for you.

YOU SHOULD STOP DOING THESE THINGS NOW TO SAVE MORE

Can you withdraw money from TFSA anytime?

You can withdraw money anytime from your TFSA account without any penalties. That is another big difference from RRSP which can be tricky to withdraw money from.

For any withdrawal, your contribution room becomes available for you NEXT YEAR. Remember, it’s not available right away in the same year.

You can deposit or withdraw anytime, just keep track of your contribution room. There is a penalty of 1% for over depositing to a TFSA account.

Can you withdraw money from TFSA to buy a house or for emergencies?

As we learnt in the previous point, you can withdraw money from TFSA anytime, you can consider TFSA as your emergency’s backup (depends how money is invested inside TFSA) or it can be withdrawn to buy a sweet home. There are no requirements to put money back to TFSA like we have for RRSP for buying your first home.

How can you open your TFSA Account?

Opening a TFSA account is a walk in the park, it is so easy, it’s almost the same as opening any savings or checking account at your local bank.

But the main thing to decide for you is how you like to invest your money inside a TFSA account. For some people, the investing part gets very confusing sometimes, they find it so difficult to make their mind.

My suggestion is you should just start. Investing is ongoing learning; you can start with any kind of investment and then just try to improve it every year by learning little more and becoming more aggressive. I started my investment with $25 per month and it went up close to $1,000 per month at some point. It’s a gradual process.

What happens at the time of Death of the TFSA Account holder?

No one really wants to be there, but it is the fact that we will die someday. It’s good to know what really happens to your hard-earned money once you die.

Money goes to Successor or Beneficiary – Money goes to your Successor’s TFSA account without affecting their contribution room at all. There is a big benefit of doing this, money can still grow tax free in your successor’s TFSA account. Note, just your spouse or common law partners can be Successor or Beneficiary and you are not allowed to assign Successor or Beneficiary in Quebec, unfortunately I live in Quebec.

 Learn more about different between Successor or Beneficiary and other rules.

Money goes to your Estate Tax Free – I love it that at least it is tax free, no tax cut for tax man, makes me feel good after paying so much tax all my life.

Just imagine, if you have any non-TFSA investment account worth $1 million built up over 30-40 years. You will be taxed at 50% or higher at the time of your death, that’s half of the money furrrr.. (fly away). That is why a TFSA account is so important.

Is TFSA right for you?

This is one of the main questions you should be asking. In general, any money invested other than RRSP should be under a TFSA account.

Personally, I prefer all my stock investments to be done under a TFSA account to save taxes in future.

Here is another good reason to invest in TFSA, you will have to withdraw money yearly from your RRSP account and pay taxes and the government will give you less social security incentive because you have a steady income coming from RRSP. While, withdrawing from TFSA does not have any taxable income and no issues with social security benefits.

Taxes keep on increasing anyway, who knows how much taxes we must pay in future, I would invest in TFSA which saves me future taxes.

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When should I choose RRSP over TFSA?

Two scenarios’ for considering RRSP over TFSA.

1.      You have very high personal income; we are talking about above $100,000 – $150,000 per year because RRSP helps your taxes significantly.

2.      Your employer does match the contribution to your RRSP account, it’s free money and no one should leave it for any reason.

My plan\idea to build my own Insurance Policy using TFSA.

This is an interesting idea, probably other people thought about it as well but I haven’t heard anyone talking about it yet.

What is common between TFSA and Insurance: No taxes at the time of withdrawal.

There are two kinds of Insurance policies, Term and Life.

I personally prefer Term policies because it’s very cheap and it does exactly what it’s supposed to do, provide you insurance protection. But it finishes at the end of Term if insurance does not die, no cash benefits at the end, normally available for 10 years, 20 years or 30 years.

Life Insurance policy is much more expensive compared to Term policy, but the beneficiary will receive some amount at the end whenever the insurer dies. Another main point here, mostly it is a fixed amount which is decided at the time you bought the policy.

My simple Idea, I bought Term policy till age 65 which was very cheap, and I saved a lot of money instead of buying Life policy, but I took that saving of around $200 – $400 per month and invested that in Index funds under a TFSA account.

I used a compound interest calculator based on my $200 investment to predict returns and my returns will be much better than Life policy. Longer you live, the better returns there will be which is not (exactly the same way) possible in Life policy and I can decide how I want to invest my money instead of the insurance company.

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