Tax-free 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 investment products. In addition to cash, you can have GICs, bonds, stocks, mutual funds, ETFs and many other products in your TFSA.
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 2023 is $6,500.
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 2023, the TFSA dollar limit is $6,500. 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 $88,000 in 2023.
Misconception #5: Funds withdrawn from your TFSA are taxable.
Funds withdrawn from your TFSA are tax-free.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-tax dollars but RRSP contributions are made with pre-tax dollars. You’ll need to consider your financial circumstance, including your income tax rate today and what you think your tax rate could be in the future, when you need the funds.