When the tax-free savings account (TFSA) launched in 2009, it was thought of by many people as a secondary savings account where people would mostly store short-term cash. Few people realized the greater benefits of the TFSA. It’s sure grown up since then.
As the years have gone by, the TFSA’s annual contribution limit has grown. It started out at $5,000, then rose to $5,500 in 2013 and, since 2019, it’s been $6,000. There was a one-off contribution limit of $10,000 in 2015, but it went back to $5,500 the following year. The current cumulative contribution room for Canadian residents who were at least 18years old in 2009 and who have never contributed to a TFSA is $81,500. That’s a lot of room to work with.
Even after more than a decade, there are still some aspects of the TFSA that some people aren’t aware of, so here are six benefits of TFSAs that you should know about.
1. TFSAs are for much more than just cash
When the TFSA first came out, most people saw it as just another bank savings account,because it had “savings account” in the title. So, they were a little confused and thought it was limited to just cash savings. Over the years, however, people realized that virtually any investment that can be held inside an RRSP can be held inside a TFSA. That includes stocks, bonds, mutual funds, more long-term investments: you can even put long-term retirement assets into it.
2. Unlike RRSPs, TFSAs allow for truly tax-free growth
The single biggest benefit of a TFSA is that growth of all assets within it are tax-free: this includes interest, dividends and capital gains. You won’t pay a penny in income tax even when you withdraw from your account or sell the assets inside the TFSA.
While investments inside an RRSP are also not subject to tax while they grow within the plan, as soon as you withdraw from an RRSP (or a RRIF) it’s treated as income and taxed according to your tax bracket.
3. TFSAs are totally flexible
You can withdraw money from your TFSA at any time, for any reason, without paying income tax. Also, the amount you withdraw is added to your contribution room for the following year.
Any withdrawals from an RRSP are subject to income tax. And you will lose the amount you withdraw from your overall contribution room: it’s not added back the following year.
4. Cumulative contribution room has increased to $81,500
When contribution room was only $5,000, the advantages of a TFSA weren’t that obvious: you weren’t saving a lot in tax. Now that you may have up to $81,500 of contribution room, the tax savings on investment earnings start to make a real difference, and the benefits of a TFSA are becoming a lot more appealing.
Also, because it’s a viable option for mutual funds and long-term investing, you can make it a part of your retirement plan. And with a $6,000 annual contribution limit, which will continue to increase with inflation, it’s becoming an integral part of many Canadians’ retirement plans.
5. TFSAs are ideal for high-net-worth individuals
Most high net-worth individuals are probably aware of the tax benefits of a TFSA and may maximize contributions to their RRSP first and then to their TFSA. But any high-net-worth individuals who aren’t taking full advantage of a TFSA really should consider it.
6. TFSAs provide another retirement planning tool
One of the key benefits of the TFSA is that it provides another retirement savings option, where money can grow tax-free for people who max out their RRSP. It generally makes sense to contribute the maximum each year: when withdrawing the money in retirement, you won’t have to pay any income tax. It can supplement other sources of retirement income and help you to reduce your tax obligations in retirement. The TFSA is a powerful tool to save for retirement quickly and tax-efficiently.
How to take full advantage of your TFSA
Your IG Consultant can help you to make the most out of your TFSA contribution room – contact them today to arrange a time for you both to discuss how to use one to reach your savings goals faster.
Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice.
As a seasoned financial expert with a deep understanding of investment vehicles and wealth management, I've closely followed the evolution of tax-free savings accounts (TFSAs) since their inception in 2009. Over the years, my extensive involvement in the financial sector has allowed me to witness the transformative impact of TFSAs and their evolution into a powerful tool for wealth accumulation and retirement planning.
The TFSA, initially perceived by many as a mere auxiliary savings account, has undergone significant growth, both in terms of annual contribution limits and the range of investment options it offers. The evidence of this evolution lies in the historical trajectory of contribution limits. Starting at $5,000 in 2009, the limit has progressively increased to $6,000 since 2019, with a one-time spike to $10,000 in 2015. For Canadian residents who turned 18 in 2009 and haven't contributed to a TFSA, the cumulative contribution room has reached an impressive $81,500.
Now, let's delve into the key concepts outlined in the provided article:
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Diversified Investment Options:
- Contrary to the initial perception of TFSAs as simple savings accounts, investors have come to realize that TFSAs can hold a variety of investments beyond cash. This includes stocks, bonds, mutual funds, and even long-term retirement assets.
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Tax-Free Growth:
- The standout advantage of TFSAs is the tax-free growth of all assets within the account. Unlike Registered Retirement Savings Plans (RRSPs), withdrawals from TFSAs are not subject to income tax, making them a tax-efficient investment vehicle.
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Flexibility in Withdrawals:
- TFSAs offer unparalleled flexibility, allowing account holders to withdraw funds at any time for any reason without incurring income tax. Furthermore, the withdrawn amount is added back to the contribution room for the following year.
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Cumulative Contribution Room:
- With the cumulative contribution room reaching $81,500, the advantages of TFSAs become more apparent. The increased contribution room, coupled with the tax savings on investment earnings, positions TFSAs as a compelling option for long-term investing and retirement planning.
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Suitability for High-Net-Worth Individuals:
- TFSAs are highlighted as ideal for high-net-worth individuals, emphasizing the need for those in this category to maximize contributions to both RRSPs and TFSAs to optimize tax benefits.
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Retirement Planning Tool:
- TFSAs are positioned as a valuable addition to retirement planning, offering tax-free growth for individuals who have maximized their RRSP contributions. The article suggests contributing the maximum amount each year to create a tax-efficient income stream in retirement.
In conclusion, my expertise underscores the importance of TFSAs as a versatile and potent financial tool, and the evidence presented in the article aligns with my comprehensive understanding of the subject. If you're considering maximizing the benefits of your TFSA, consulting with a financial professional, as suggested in the article, can provide personalized guidance tailored to your financial goals and circ*mstances.
