In 2009, Canadian Government introduced one of my favorite investment tools. Tax Free Saving Account (TFSA). A lot of people get confused and consider TFSA as only saving account however using TFSA as saving account is just being plain silly as TFSA can be one of the best investment tools for every Canadians regardless of their annual income.
Let’s go through the details.
- Anyone over age of 18 can contribute $5,000 per year between 2009 up to 2012 ($5,500 per year since 2013, $10,000 per year from 2015) so If you haven’t made any contribution to TFSA then you can deposit up to $20,000+ 11,000= $31,000 in 2014 and additional $10,000 in 2015. If you are married then your family can contribute at least $82,000 for tax free.
- TFSA can grow and be withdrawn tax free. Unbelievable. So even if you make $10,000 through interest, dividend and capital gain from your TFSA investment, you don’t pay any taxes. Then why would you ever want to use TFSA as saving account which would only give 0.5%-1% of annual interest income as opposed to 8-10% from well diversified stocks or holding ETFs?
- You never lose contribution room so the contribution room can be carried forward forever and you can withdraw money at any time without any withholding tax. If you have taken money out of the account, you can redeposit these amounts in the following year without losing the room available in your TFSA.
- Any money withdrawn from TFSA do not affect assistance from government programs for low income families such as GST credit, old age credit, child tax benefit, Guaranteed income supplement etc…)
So what can you do with TFSA?
- Income splitting- Couples can utilize it as income splitting tool as withdrawals from your spouse won’t get taxed at all.
- Invest in foreign dividend companies
- Regular non registered account- If you get foreign dividend income then they are taxed at your marginal tax rate.
- RRSP- Foreign dividend income, interest income and capital gain grow tax free but will get taxed when withdrawn.
- TFSA- Foreign dividend income, interest income and capital gain grow tax free and withdrawal is completely tax free. So include strong foreign dividend companies in your TFSA investment.
- Invest in high yield bond or income trusts as the dividend and interest income will be completely tax free.
- It is not only good for retirement but also short term emergency/ saving fund plans such as buying a house, car etc… as withdrawal is completely tax free.
How do you open TFSA?
It is as easy as opening your debit account from any major banks. Just ask them that you want to open TFSA account. Some paper works then you are good to go. I used to have my TFSA account opened with TD bank and my money was held in mutual funds however I realized I was paying too much of MER(Management Expense Ratio= managing fee) within mutual funds so I moved entire balance to TD waterhouse (TD brokerage) TFSA account. Within that as you may know I hold some ETFs and stocks. I personally recommend you to open TD brokerage TFSA account however if you cannot for any reason, open TD bank TFSA account and go with TD e-series which has very reasonable MER as opposed to mutual fund accounts. TD e-series would give competitive performance with low fees.
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