What are TFSAs and how do they work?

I have met with a number of clients and at almost every meeting the topic of a Tax Free Savings Account (TFSA) arises. Almost every single client has heard of TFSAs however nine times out of ten they do not know how TFSAs work, so that led me to write this breakdown of the governments (fairly) new great tool called the Tax Free Savings Account.

TFSA Eligibility

TFSAs were introduced by the government to the Canadian public on January 1, 2009. In order to be eligible to open and contribute to a TFSA you must be a resident of Canada and must be over 18 years of age. Unlike registered retirement savings plans (RRSPs) however, there is no maximum age for TFSAs (RRSPs have a cut off age of 71, at which point the money must be transferred out of your RRSP).

Contributions

Each year, everyone entitled to a TFSA in Canada accumulates ‘room’ in their TFSA meaning your contribution limit accumulates year over year. The following shows an example of someone’s contribution limit assuming they were 18 when TFSAs were introduced in 2009.

Year	Contribution Room	Cumulative Contribution Room*
2009	$5,000	$5000
2010	$5,000	$10,000
2011	$5,000	$15,000
2012	$5,000	$20,000
2013	$5,500	$25,500
2014	$5,500	$31,000

            *Cumulative room assuming no contributions since TFSA inception

As noted in the chart above, if someone had not opened a TFSA to their name since the inception of the savings vehicle in 2009, they would have $31,000 of contribution room that they could put money in, to shelter from taxes as all contribution room is carried forward. As you can also see in the chart above, the government has promised to rise the contribution room by $500 as needed to keep up with the rate of inflation (the first rise being in 2011).

Investments

What can you do within your TFSA? Some people will settle with the 0-2% the bank may pay them for just holding the account, however you can actually hold almost any type of investment inside your TFSA. The following are some types of investments you can hold within your TFSA:

• Mutual funds
•  Segregated funds
• Stocks
•  Bonds
•  GICs
•  Gold
•  Cash

The nice thing about a TFSA is that since these investments are held inside your account, all the growth that happens inside that account is 100% tax-free! That means no reporting your gains and no government dipping their hands into your return on investment.

What are you waiting for?

Some experts have matched TFSAs with RRSPs in terms of the overall benefits to the consumer, and some have even ranks TFSAs well above RRSPs. I believe everyone’s situation is different however I am a firm believer in TFSAs and if the client’s situation permits, I incorporate it into all of my client’s plans.

Keep in touch for my post where I will discuss RRSPs vs TFSAs and which one you should consider first.

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Let’s sit down today and assess your plan. Let’s look at your current TFSA and see if you are getting the biggest bang for your buck; and if you don’t have a TFSA lets meet and go over your personalized plan.