With tax season on the horizon, everyone is scrambling to make last-minute RRSP contributions. Opening a Tax Free Savings Account (TFSAs) may not be on your radar – but it should be. If you’re a millennial, here’s everything you need to know about a TFSA and why you should consider contributing to a TFSA pronto.
What is a TFSA?
Introduced in January 2009, TFSAs are a registered account in Canada that offers special tax benefits. Within a TFSA, you can hold any type of savings or investment account – cash, GICs, mutual funds, stocks and bonds – and any income earned is tax exempt (even when withdrawn). This means any earnings are compounded tax-free over time. A win!
Plus, as of January 1, 2019, the Canadian government raised the annual TFSA limit to $6,000, up from $5,500 last year. This means that Canadians who were at least 18 years of age in 2009,can have up to $63,500 total in a TFSA.
RRSP vs. TFSA
TFSAs and RRSPs are both like containers holding your cash or investments, but there are some key differences between the two. Comparing a RRSP vs. TFSA, the biggest difference is how and when you are taxed. With RRSPs, you get a tax deduction in the year you make a contribution. However, if you withdraw your funds, you must pay income tax that year. Meanwhile, you don’t get a tax deduction for TFSA contributions, but you can withdraw the funds tax-free at any time.
In an ideal world, you should contribute to both TFSAs and RRSPs to cover all your bases. If you’re a millennial, a TFSA might be a better choice so you can reap the benefits of TFSA flexibility and to keep your RRSP contribution room open until your income increases and puts you in a higher tax bracket.
|Annual contribution limit||$6,000 (as of 2019)||18% of previous year’s earned income (up to a max.of $26,500 for 2019)|
|Ages you can contribute||18 and over||Up to age 71|
|Get a tax-deduction in year of contribution?||No||Yes|
|Pay income tax in year of withdrawal?||No||Yes|
How to Invest in a TFSA
These days, it's easier than ever to open and contribute to a TFSA. Many people choose to open a TFSA in a high-interest savings account, like Tangerine. But if you’re looking for more growth, Canada’s robo advisors are a better option for easy investing that follows the couch potato investment strategy.
To open a TFSA, you have several options:
- Open a TFSA account with an online discount brokerage, such as Questrade or Virtual Brokers, to buy low-fee ETFs
- Open a Tangerine Tax-Free Investment Fund, which is a balanced portfolio of index funds to match your risk profile
- Open a TFSA account with a robo advisor, such as Wealthsimple, Questwealth Portfolios, BMO Smart Folio, Wealth Bar, Nest Wealth, Justwealth, and Planswell, so you can choose a pre-fab portfolio of ETFs that matches your risk profile
Just set up pre-authorized contributions and then let the robo advisor do all the work of looking after your portfolio – at a much lower fee than what traditional financial advisors and mutual funds charge.
TFSA Rules: At a Glance
- You must be over 18 years of age
- You can contribute up to your TFSA contribution room. As of 2019, the cumulative maximum contribution is $63,500 for those who were 18 years of age in 2009.
- A tax applies to all contributions exceeding your TFSA contribution room
- Withdrawals will be added to your TFSA contribution room at the beginning of the following year
- You can replace the amount of the withdrawal in the same year only if you have available TFSA contribution room
- Unlike RRSPs, TFSAs do not expire – meaning there’s no requirement to withdraw the funds by a certain age.
- Any unused space in your contribution maximum can be carried forward to future years.
You can’t go wrong with opening a TFSA, and if you’re a millennial, it makes sense for achieving your long-term financial goals. Go for it!