A Tax Free Savings Account (TFSA) is a Government of Canada-approved savings account that allows taxpayers to earn investment income tax-free. You can set money aside in eligible investments and watch those savings grow tax-free throughout your lifetime.
Regardless what you're saving for - vacation, car, emergency fund, or to supplement your RRSPs or RESPs - our staff can explain your options and help you choose the best investment.
Click on the link Canada Revenue Agency (CRA) website for more information about TFSA's.
Let's start with this: the maximum amount you can contribute to your TFSA per year is now $10,000. This new, higher limit is effective January 1, 2015.
So based on the contribution limit, let's say you deposit $10,000 into your TFSA on January 1st. And then on March 1st you withdraw $3,000. This "frees up" $3,000 in contribution room.
Now, you may think that putting that money back into your TFSA is as simple as making a $3,000 deposit sometime in during the year. That would take you back to $10,000, which is the annual limit. Makes sense, right? Unfortunately, the answer is no. According to the Canada Revenue Agency, you'll have contributed $13,000 - the $10,000 you contributed in January and the $3,000 you contributed later in the year. In other words, the CRA doesn't recognize withdrawn amounts when it calculates your annual contribution total.
As a result of the over-contribution, the CRA may penalize you 1% for each month the excess contribution stays in your account.
What can you do to avoid all of this? The answer may not be all that logical, but it's simple: if you withdraw funds from your TFSA, don't put them back until the following year. So in the scenario above, you wouldn't put the $3,000 that you withdrew from your TFSA back into your account until next year (or any year after that).
Thankfully, contributing to your TFSA is not a "use it or lose it" thing. In other words, if you don't maximize your contribution during any given calendar year, you will be able to carry that unused amount to the next year, the year after…and so on.
For example, let's say that in 2009 (when TFSA's launched) you deposited $1,500 into your TFSA and haven't made a contribution since. That means in 2015 you'll be able to contribute:
Add it all up, and you could contribute $39,500 to your TFSA in 2015.
TFSA's are a great way to boost your savings and help you keep more of your money. At Debden Credit Union our knowledgeable staff is here to answer all of your questions and help you make an informed decision when choosing the right TFSA investment for you. Contact us today.