TFSA (Tax Free account) Mechanics

Jan 23, 2019 | Jeremy Goldfarb


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I've had a few calls on this, and there are some misunderstandings regarding the TFSA so I figured I would share some of my thoughts today.

 

The Tax free savings account is a bit of a misnomer as it confuses some clients into thinking that it is simply that.....a savings account. In actual fact, the TFSA should be called a TFIA, or a TFA, but we are not going to change that today

  1. You can hold almost any investment vehicle in the TFSA including stocks, bonds, ETFs,  Mutual funds, and some lesser known alternatives. There are limitations (physical real estate for example), but I will leave that out for now.
  2. Any gains whatsoever are tax free. Interest, dividends, capital gains.......all tax free. If you were to buy a stock for $1, and sell it for $101, you have a tax free capital gain of $100.
  3. contributions are not deductible, and are made from after tax dollars. This is different from an RRSP where you get a direct deduction of taxable income
  4. you can withdraw your investment gains at any time either in part, or in full, and you can also do the same with your investment principal. You do regain contribution room if you withdraw previously contributed capital
  5. Recontributing withdrawn capital must wait to the following tax year (not such a bad deal)
  6. Contribution amounts are limited (see my previous blog post for the numbers)

NOTE: The TFSA should be a part of of your overall long term savings strategy. Some may argue that it is the best alternative, however I believe that it should be used in conjunction with RRSP savings (and corporate savings if you have that option) as part of an overall plan.

 

I would strongly recommend consulting with your advisor on how the TFSA would work with your own personal needs. Get a plan done......then get a TFSA opened for you and start savings (see what I did there?)

 

Jeremy

 

 

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Personal finance Tax