Banker's View : Tax Free Savings Account - In Simple Terms

Tax Free Savings Account - TFSA 

From a bankers perspective, love this investment plan.

Here are my reasons why:

1. Your money grows in the account tax free and when you take money out, NO TAX.
2. Any interest or capital gains that you get are TAX FREE : D
3. You can name BENEFICIARIES on the it. 
4. You can invest in a GIC, MF, SHAREs or a BASIC SAVINGS ACCOUNT with in this plan !!

So lets put this to the test

If for example I had a TFSA and invested $5000 in lets say a GIC  sitting with in the TFSA  for 3 years earning 2.1% over all.

To keep things simple:

$5000 x .021% = $ 105 in interest income for year 1
Times this by 3 = $315 Interest Income for 3 years.

This $315 is NOT TAXABLE in or when you take it out of the TFSA!

vs

If you had the same GIC out side TFSA, your financial institution will give you a T5 slip. T5 is given to you because you earned interest income and which you will have to include in your taxes.

Note: If you earned less than $50 in interest income there is no T5 generated, because it too less of interest for the whole year. 

 : D

Here are the three investment options that you can have with in a TFSA:

Now the question is, can you put in a million dollars?   

Unfortunately you can not. This investment plan was started by the government in 2009.

It was designed to encourage Canadians to save money rather than spend it all. How much can you put in?

Here is the deal

Every year you can put in a certain amount. If you were 18 in the year 2009 you could have contributed $5000 in to this plan. Since then till 2012, you could have put in $5000 every year. 2013 to 2015 the amount was increased to $5500. Simple because of the rise in inflation.

Most importantly, you can carry forward the accumulated room!! :D

Contribution years:

2009                    $5000
2010                    $5000
2011                    $5000
2012                    $5000
2013                    $5500
2014                    $5500
                            $31000 

Jan 1st 2015 you can contribute another $5500

The only thing to keep in mind is:

What ever you take out this year from the TFSA you can not put it back in to the TFSA until the next year.

Exception: If you have contribution room you can put that money back.

Note # 1: Its better to call CRA if you do lots of withdrawals and contributions from the TFSA during the same year.

Note # 2: If you do over contribute, there is a penalty of 1% per month of the excess amount.

This is the plain and simple facts about the TFSA. If you would like more information please visit Canada Revenue Agency's web page, or email me for more details.