The Tax-Free Savings Account (TFSA) scheme get launched in 2009. It’s a method for people who are 18 or older and have a valid social security number to put money aside tax-free for the rest of their lives. Contributions to a tax-free savings account (TFSA) are not tax-deductible. Fees related to TFSAs, and any interest or money borrowed to contribute to a TFSA, are not tax-deductible.
What Is a TFSA
A tax-free savings account (TFSA) does not tax contributions, interest, dividends, or capital gains, and withdrawals are also tax-free. TFSA can hold both cash and investments such as mutual funds, securities, and bonds. This account is available to all Canadian residents aged 18 and above and used for anything.
Rules for TFSA Investment
Qualified investments are those that can be kept in a TFSA. The Income Tax Act specifies which investments get permitted in a TFSA. A TFSA can hold the same types of assets as an RRSP. The following are some examples of investments that are eligible:
- Guaranteed Income Certificates (GICs)
- Government and corporate bonds
- Mutual Funds
- Exchange-traded funds (ETFs)
Why Canadians Invest in TFSA
- No need to pay any taxes on your investment earnings.
- Even if you’re retired or unemployed, you can contribute.
- Contribute as long as you want—there are no age restrictions.
- Indefinitely make up for contribution room that was missing in earlier years
- Withdraw your funds whenever you want, for any reason.
- While saving for retirement in an RRSP, use a TFSA to save for anything.
Can I Withdraw Money From TFSA?
You can withdraw money from your TFSA at any time, but there may be certain product limits (e.g., GIC maturity dates). You can put money back into your TFSA without reducing your contribution room the following year. $500 is the minimum amount that you get withdrawn.
The ability to withdraw funds from a TFSA without incurring a penalty or paying significant withdrawal taxes is the key reason why people do so. Many people take money out of their TFSA when they retire or have a primary life event, such as getting married or buying a house. Taking money out of your TFSA helps you postpone having to take money out of your RRSP, which would be taxed. Retirees can also withdraw funds from their TFSA without jeopardizing their retirement benefits, like Old Age Security.
Another reason to withdraw funds from your TFSA is that any funds you cash out this year will get added to the amount you can donate the following year, making it a straightforward (and tax-free) way to boost your annual contributions.
Withdrawal Limit in TFSA
You can take money out of your TFSA whenever you want and as much as you want. There’s no limit! Even if you withdraw during the year, you can’t contribute more than your TFSA limit.
Each year, you have a defined contribution limit. You can only limit your contribution room by adding money to the account during that year. Any money you take out will increase your contribution room for the following year.