Tax-free Savings Account (TFSA)

As per the Tax-free Savings Account meaning, it is an account in which interest earned, contributions, Capital gains, and dividends are not taxed. The same could be withdrawn without any Taxes. While this account is referred to as a savings account, a TFSA is also capable of holding specific investments like securities, Mutual Funds, Bonds, and even cash.

It is known to be applicable for individuals above the age of 18 years in Canada and can be utilized for any objective.

Tax-free Savings Account Canada

TFSA was introduced in Canada in the year 2009. During its introduction, the contribution limit was set to Canadian $5000 on an annual Basis. In the year 2013, the given limit was increased to reach Canadian $5,500 on an annual basis, while remaining the same until 2018. Only during the year 2015, the given limit was increased to reach as much as Canadian $10,000. In the year 2019, the limit was raised to reach Canadian $6,000. It remains the same until now.

Benefits of TFSA

The major advantage of holding an account with TFSA is that you are not going to be taxed on the Income earned on your investment. For instance, let us consider two savers A & B. During the start of the year, A goes ahead with putting $6000 in the investment account and earns 7 percent on an annual basis. At the same time, B is also known to implement the same strategy, but goes Investing within the TFSA. Both A & B are going to possess $6420 at the year’s end. However, B will be capable of withdrawing the entire amount of $6420 without any tax penalty. On the other hand, A is going to be taxed on the savings of $6420 that he had earned in the form of Capital Gain.

Contributions Related to TFSA

The amount that you are enabled to deposit into the respective TFSA is referred to as the contribution room of the individual. Even when you might not be having the TFSA at the given moment, you were able to accumulate a contribution room for the years since the time of 2009 –when you were above the age of 18 years and a resident of Canada.

All types of unused contribution rooms from a year could be carried forward to the succeeding year.

Withdrawals Related to TFSA

The withdrawal amount might be added back to the respective contribution room at the start of the next year.

TFSAs Vs. RRSPs

While the RRSP or Registered retirement Savings Plan account is meant particularly for retirement-centric savings, the TFSA is utilized for saving anything out there. The TFSA is different from RRSP in terms of the respective deposits and withdrawals that are made.