The TFSA is one of the most versatile savings bank accounts in Canada. In fact, it is much more than a savings account. Check out this post to know what it is, how it works, and more.
If you are new to the world of investments in Canada, you will soon realize that one of the most critical considerations to select an investment option is its tax efficiency. Many of the investment options that advertise a higher rate of returns are subject to taxes, which significantly impacts the returns you actually receive after taxes.
To provide people with a long-term tax-efficient investment option, the Canadian government introduced TFSA (Tax-Free Savings Account) in 2009. The account has now become the most popular savings vehicle in the country since the RRSP (Registered Retirement Savings Plan) was introduced in 1957.
Take a look at what TFSA is, how it works, and more-
- What is TFSA?
The Tax-Free Savings Account or TFSA is much more than a savings account. While you sure can open a TFSA and deposit your savings where it will earn interest, the account can also hold certain investments like securities, mutual funds, GICs (Guaranteed Investment Certificates), and even bonds.
All the investment income, capital gains, dividends, or interest that are generated from any investments held in TFSA or cash deposits is tax-free. Also, unlike RRSP, the TFSA account holder will not be taxed even at the time of withdrawing the investment.
- Can You Invest Any Amount in TFSA?
No, the CRA (Canada Revenue Agency) sets the TFSA contribution limit every year. For 2020, the limit is $6,000. However, if you do not invest anything or don’t use the maximum limit, the unused limit will be rolled over to the next year.
For instance, if you don’t invest anything in TFSA in 2020, the contribution limit for 2021 will be the limit set by the CRA plus $6,000, which was the contribution limit for 2020. Also, even if you withdraw any amount from your TFSA, you will get an additional limit of the same amount in the following year.
- Who is Allowed to Open TFSA?
Only Canadians who are above 18 years and have a Social Insurance Number (SIN) are allowed to open TFSA. One important thing you should know is that if you’ve recently turned 18, the contribution limit for you would be the total of contribution limits since the introduction of TFSA in 2009.
So, the contribution limit for you would be $69,500. Also, as mentioned above, the unused limit will be rolled over to the next year.
- What is the Interest Rate and Withdrawal Limit of TFSA?
If you want to deposit your cash savings, the maintained balance in the TFSA will earn interest. The interest rate depends on the bank you select. Some top banks offer as much as 1.30% p.a. and the interest is deposited into the account every month. Note that you earn tax-free interest from TFSA.
Talking about the withdrawal limit, there are none. Unlike most other types of savings accounts in Canada, there are no monthly limits on the number of deposits or withdrawals you make in your TFSA.
- Are There Any Account Administration Charges?
You are not required to pay any administration or maintenance charges when you open a TFSA account. This also means that you get to keep all the returns that your TFSA account generates as the account is tax-free, and there are no administration charges.
This makes TFSA one of the most tax-efficient and affordable investment options for anyone wanting to earn safe and hassle-free returns.
TFSA: The Safe and Tax-Efficient Way to Watch Your Savings Grow
As can be seen above, TFSA is a lot more than just a basic savings account. It is an investment vehicle that offers a host of valuable benefits. Apart from cash deposits, it allows you to hold many other types of investments so that you can earn higher tax-free returns. Moreover, there are no account administration charges, and you get to keep all of your money.
Get in touch with a reputed bank in Canada to know more about TFSA and begin the application process so that you can start earning tax-free returns as quickly as possible.