Whether you are buying your first home or considering your retirement investment choices, there are registered plans and services that can help you save for your goals on a tax assisted basis. Most registered plans are designed to help you save for retirement and manage your income stream in retirement. This guide provides an overview of the benefits of Tax Free Savings Accounts, and how they fit into your financial situation.

The Tax-Free Savings Account (TFSA) is often described by the financial planning community as the single most important savings vehicle since the introduction of the RRSP. Introduced in 2009, a TFSA is an ideal tax-advantaged savings vehicle that allows your investment holdings to grow and earn income tax-free.

Contributions to a TFSA are not tax deductible for income tax purposes; however your savings, including interest, dividends and capital gains grow tax-free inside your account. In addition, there is no tax payable when you make a withdrawal from your TFSA.

The savings you accumulate in your TFSA can be used at anytime and for any purpose –it’s completely up to you.

Each year you accumulate additional contribution room. Unused TFSA contribution room can be carried forward indefinitely. For example, if you contribute $1,000 less than your annual limit in a given year, that $1,000 will be added to your contribution limit in the following year. Your annual TFSA contribution limit is shown on your annual Notice of Assessment from Canada Revenue Agency (CRA).

 

TFSA Withdrawals

Withdrawals from a TFSA are tax-free. An amount withdrawn in the current year will be added to your accumulated contribution room at the beginning of the next year. For example, assume a $5,000 contribution is made in June of the current year, followed by a withdrawal of $5,400 ($5,000 contribution + $400 gain) in October of the same year – as of January 1st in the following year, an additional $5,400 will be added to your TFSA contribution room.

Given the tax-free nature of the investment income and flexibility regarding withdrawals and re-contributions, your BMO financial professional can explore how a TFSA can help you maximize your investment growth with tax-efficient strategies. Whether you are looking to tax-shelter non-registered interest or dividend income or depositing surplus pension income, your BMO financial professional can help you determine the strategy that is right for you.

 

Planning tips and considerations:

  • Neither the income earned nor withdrawals within a TFSA will affect your eligibility for federal income-tested benefits and credits (e.g. Old Age Security, Child Tax Benefit, GST credit, age credit). Consider depositing your surplus RRIF payment or pension income into your TFSA for future tax-free growth.
  • You can provide funds to your spouse, common law partner (hereinafter referred to as “spouse”) or even adult children to allow them to contribute to their own TFSA (subject to their personal TFSA contribution limit). None of the income earned within their TFSA is attributed back to you.
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