Starting in January, Canadians have an exciting new way to invest their money — one that allows them to accumulate returns tax-free.
The Tax-Free Savings Account, or TFSA, is a new type of registered account. It’s similar to a registered Retirement Savings Plan (RSP), but it has some important — and very powerful — differences that you can put to work to help your savings and investments grow.
The TFSA helps your money grow tax free
The rules of the TFSA are pretty simple:
- It’s available to residents of Canada 18 years◊ and older
- You can deposit up to $5,000 a year into your TFSA.
- You don’t receive a tax deduction for your contribution to a TFSA, unlike an RRSP.
- All interest, investment income and capital gains you earn inside the TFSA are tax-free.
- You can withdraw money from a TFSA at any time (depending on what you invested in), without paying any tax. Amounts withdrawn can be re-contributed in subsequent years.
Smart ways to use a TFSA
Use the TFSA and use its unique and flexible features in some important strategic ways to help your own specific situation.
Do you have non-registered savings?
Use the TFSA to eliminate taxes on interest or other investment income you currently earn in taxable accounts.
Do you want to save for a long-term goal?
The TFSA is the perfect choice for long-term savings goals. That’s because the interest and earnings accumulate completely tax-free — so you accumulate more and enjoy extra compound growth, year after year. How much difference will this make to you? Suppose you save $200 a month, and earn a return of 5.5% each year. If you put that money into a TFSA instead of a non-registered account, at the end of 20 years you’d have $11,000 more to put towards your dream. Consider using TFSA-Matic™ from RBC to make regular automatic contributions to your TFSA.
Are you saving for retirement?
One of the first questions many people ask is whether they should put money into a TFSA instead of their RSP.
Think of the TFSA as a complement for your RSP. There are many reasons why you should continue to contribute to an RSP. For example, to get the tax deduction on your annual contribution. Plus, you’re more likely to keep that money until you reach retirement age.
In our poll in the last issue of Pursuits & Possibilities, more than a quarter of you (28%) said that saving for your retirement was a top financial priority. If you’ve “maxed out” your RRSP and have no more contribution room, you can deposit money into a TFSA as an additional source of retirement savings. Best of all: Money you earn within a TFSA and money you withdraw from it won’t affect your eligibility for government benefits and credits.
Would you like an easy way to income-split with your spouse?
With a TFSA, it’s simple. The partner who earns more gives money to the lower-income partner, who deposits it into his or her TFSA. This helps equalize your incomes in the future to reduce your overall tax bill.
Are you already retired?
If you’re withdrawing money from your registered Retirement Income Fund (RIF) and you don’t need it all to cover your living expenses, you can consider putting some of it (subject to the $5,000 annual limit) into a TFSA and enjoy tax-free compound growth on your money. That’s a big help for seniors who need to stretch their money as far as possible.
What would you like to know?
The TFSA is an exciting new investment option for Canadians. And it’s important to understand the best way to build the TFSA into your overall investment strategy. Talk to an RBC advisor at your nearest branch about how you can use this powerful savings tool to your advantage. Or, learn more by visiting our web page that’s all about TFSAs, or by calling 1-800-463-3863.
FAQs about the TFSA
Here are some of the questions that other Canadians are asking about how the TFSA works.
What kind of investments can I hold in a TFSA?
You can hold a wide range of investments in your account. similar to the investments you can hold in a RSP. In a RBC TFSA you can hold RBC Funds, RBC GICs and RBC Savings Deposits.
How much can I deposit?
You can deposit $5,000 a year and your contribution room is cumulative. So, if you don’t make the full contribution in any year, it carries forward, indefinitely. If you take money out, you can re-contribute that same amount, any time after the year of withdrawal.
How much can I withdraw? Will I be penalized?
You can withdraw as much as you want and RBC doesn’t charge a TFSA withdrawal fee, nor are you required to pay taxes on the withdrawal or repay the amount withdrawn.
◊ The age of majority is 19 for residents of Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, Northwest Territories, Yukon and Nunavut, which may delay the opening of a TFSA. However, the accumulation of contribution room will start at age 18.
The information provided on the Tax-Free Savings Account is based on what has been communicated by the Government of Canada.
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