Tax-freeTax-free Money that you do not pay tax on.+ read full definition savings accounts (TFSAs) have been available to Canadians since 2009, but some misconceptions may prevent you from making the most out of it.
Here are some common misconceptions along with the correct information.
Misconception #1: TFSAs are just like regular savings accounts.
TFSAs can also hold different investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition products. In addition to cash, you can have GICs, bonds, stocks, mutual funds, ETFs and many other products in your TFSATFSA See Tax-Free Savings Account.+ read full definition.
Misconception #2: Your annual TFSA contribution room is based on income.
The contribution room is not based on your income. Every year, you may contribute up to the TFSA dollar limit plus any TFSA withdrawals or unused contribution room from previous years.
The annual TFSA dollar limit in 2020 is $6,000.
Misconception #3: If you do not make a TFSA contribution this year, you will lose that contribution room forever.
You can carry forward any unused contribution room. For 2020, the TFSA dollar limit is $6,000. If you do not make a contribution or make a contribution less than the annual dollar limit, the unused contribution room can be carried forward into future years.
Misconception #4: You can open a TFSA at any age.
If you are 18 or older with a valid social insurance number (SIN), you can open a TFSA. If you were 18 years or older in 2009 and never contributed to a TFSA, you could have an available TFSA contribution of $69,500 in 2020.
Misconception #5: Funds withdrawn from your TFSA are taxable.
Funds withdrawn from your TFSA are taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-free. This can include your original contribution amount as well as interest, dividends and capital gains generated from the investments.
Misconception #6: You can only have one TFSA account at any given time.
You can open as many TFSAs as you wish, at different financial institutions, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year.
Misconception #7: You should contribute to your TFSA first, before making RRSP contributions.
Everyone’s tax situation and financial goals are different. A TFSA is designed to be used for any savings goal, not only retirement. Also, TFSA contributions are made with after-taxAfter-tax The money you have left after you pay taxes on money that you made working or investing.+ read full definition dollars but RRSPRRSP See Registered Retirement Savings Plan.+ read full definition contributions are made with pre-tax dollars. You’ll need to consider your financial circumstance, including your income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition rate today and what you think your tax rateTax rate The rate at which you or a business pays tax on income. Often stated as a percentage, such as 25%.+ read full definition could be in the future, when you need the funds.