1 comment on “TFSA Contribution Limit Withdrawals”

TFSA Contribution Limit Withdrawals

tfsa-limit

TFSA Contribution Limit Withdrawals

What is a TFSA?

It is funded using tax-paid money. This means that you do not get any rebate on tax when you contribute to your TFSA. The primary benefit is tax free profits, with no future taxation on withdrawals. This is unlike an RRSP where tax paid is effectively refunded when you contribute, and then tax is later assessed when you withdraw, ideally at a lower rate of tax. The benefit of a TFSA is much more straight-forward – paying no tax on growth is better than paying tax. Extracting and maximizing benefits from an RRSP can be a bit more challenging to manage due to the fact that your tax rate in the future is effectively unknown. This makes contributing to your TFSA an easy choice when you have the room available and aren’t sure if you should be using your RRSP at the time.

The benefit to be obtained from a TFSA is capped by what is known as the “contribution limit”. You may only contribute a certain amount to your TFSA. This means the amount of investments/savings that you can shield from tax is limited by the contribution limit. It is best to maximize your use of this benefit by contributing as much as possible to your TFSA before saving/investing in any taxable accounts.

Who can open a TFSA?

Per the CRA: “Any individual who is 18 years of age or older and who has a valid social insurance number (SIN) is eligible to open a TFSA.”

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/who-open-a-tfsa.html

Note that non-residents or those who were previously/will be a non-resident have special rules regarding the calculation of contribution room – refer to this link: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1116

TFSA Limit / Withdrawals

Generally the calculation of a particular years contribution limit is as follows:

  • your TFSA dollar limit plus indexation;
  • any unused TFSA contribution room from the previous year; and
  • any withdrawals made from the TFSA in the previous year.

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html

In effect this means unused room is carried forward, and withdrawals are added back to the next years contribution room. Therefore you’re always free to use the TFSA since if you need the money for some other purpose you can withdraw the funds, use the money, and get the room back for later re-use.

“The TFSA dollar limit plus indexation” is not calculated by you. It is a prescribed number each year (Currently $5,500). You only accumulate TFSA room so long as you are resident, and are older than or will turned 18 during the year. You accumulate this room regardless of whether you have filed an income tax return (unlike the RRSP which requires a tax return filed to calculate the room). Non-residents should look to guidance on the linked TFSA guide above.

Your contribution room is calculated across all accounts – not per TFSA account. You may have multiple TFSA accounts at different institutions, but you must ensure that your total contributions across all accounts is not beyond the limit.

Here are some examples of the TFSA room calculation: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/examples-tfsa-contribution-room.html#xmpl2

Investment Types

A TFSA account is any account with the designation as a TFSA account. This means a TFSA goes beyond just “savings accounts”. You can have a TFSA account at a variety of institutions and it can hold cash, mutual funds, stocks (except in some circumstances), bonds, GIC’s, and even (in limited circumstances) small business corporation shares.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1121

Gains/Losses in the TFSA

Gains earned in a TFSA are not subject to taxation. On the other side, losses in your TFSA are denied from being offset against any taxable gains.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#losses_incurred

Slips, and reporting your TFSA on your tax return

So long as you have not over-contributed to your TFSA you are not required to report your TFSA contributions, withdrawals, or incomes. You do not need to fill out anything when filing your taxes. Your TFSA information (summary of activity during the year) is submitted by the institution who created the account to the CRA.

How to find your contribution limit

You can find your contribution limit for a particular year at: * CRA My Account; * MyCRA at Mobile apps; * Represent a Client if you have an authorized representative; or * Tax Information Phone Service (TIPS) at 1-800-267-6999.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1120

Your Contribution Limit is updated after each year, but it may take a while after year-end for your contribution limit to be properly updated at the CRA. The CRA needs to wait for all of your institutions to file your information, and then it takes a while for the CRA to update their systems to reflect the new limits.

Generally speaking it is a good idea to track what you would expect your TFSA limit to be to ensure that all institutions have properly filed the activity for the year. Any errors by your institutions are your own responsibility to resolve in order to avoid penalties. You can call the CRA for an activity summary if you need the detail of activity filed with them in order to reconcile your TFSA limit. If you believe there is an issue with what one of your institutions filed then contact that institution – and then contact the CRA if they are unable to help.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#p3021_26370

Day Trading in the TFSA

This is nearly impossible to comment on in a wiki article, however it needs to be at least mentioned. The issue with day-trading in your TFSA stems from the following rule – you are prohibited from using the TFSA to shield the incomes of a business activity (as a business is not an eligible investment for a TFSA). In taxation the term “business” has a specific definition that alludes to some general factors to determine what is business activity. Generally speaking passive investing, or investing through a normal adviser, or long-term buy and hold investing, would not be considered a “business activity”. However, frequent (day) trading or highly speculative trading (and the research and other activities that come along with this) ends up being seen by the CRA (and our taxation laws) as a business activity. The CRA is increasingly targeting individuals with high profits/high activity for audits of their TFSA accounts. It is NOT recommended to day trade or keep highly speculative investments in your TFSA. AGAIN, this is FAR from a detailed explanation of the issue.

Effects on Credits

As withdrawals from a TFSA are not considered to be income you can freely withdraw funds from your TFSA without concern for losing certain income based credits such as the WITB/HST/CCB or other amounts.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1117

Foreign funds

Foreign funds be held in a TFSA account (such as US dollars and US dollar denominated investments), but for the purpose of reporting the usage of contribution room/withdrawals the amounts will be converted to Canadian dollars.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#p3021_26419

Death of a TFSA Holder

I can only provide a link in this wiki article for this issue: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466-tax-free-savings-account-tfsa-guide-individuals/tax-free-savings-account-tfsa-guide-individuals.html#P44_1119

2 comments on “Investment Guide – How to invest money for Beginners”

Investment Guide – How to invest money for Beginners

  1. Personal Investment: Introduction
  2. Personal Investment: Investing For Beginners – Know Your Savings Goals
  3. Personal Investment: RRSPs vs. TFSAs
  4. Personal Investment: Retirement Planning – CPP And Beyond
  5. Personal Investment: Bonds – The Safe Bet
  6. Personal Investment: Playing The Stock Market
  7. Personal Investment: Conclusion

1. Introduction

The article “Canada Beginners Guide to Personal Investment” covers simple “tips” for dummies or beginners on how to start your personal investments without hiring a financial consultant. This is the best article to learn how to Invest in Canada in 2018.

I assume you have a steady job and ready for investments. Big or small amount doesn’t matter. The important thing is that you need to start investing. Now, keep at it for the next four decades or so and you’ll be able to retire. Successful money management goes beyond just saving a portion of what you make. To really get the most out of your earnings, you’ll need to put it to work in a few choice investments.

2. Investing For Beginners – Know Your Savings Goals

Not sure where to start? Whether you’re already planning for retirement, or saving up for another life milestone such as your first home, here are the basics for beginning investors.

3. RRSPs vs. TFSAs

Most Canadians are more familiar with Registered Retirement Savings Plans (RRSPs) than they are with Tax-Free Savings Accounts (TFSAs). This is in part because RRSPs have been around as a retirement savings’ vehicle for Canadians since 1957, and TFSAs only came into effect at the beginning of 2009.

Participating in both programs is similar in that you invest in a suite of options through your financial institution. But RRSPs get a boost from the fact that you get immediate tax savings (in the form of a deduction from your taxable income for the year in which they’re purchased). The tax-savings with TFSAs is that any money you earn on investments is non-taxable. (Down the road, when you do withdraw money from RRSPs, you’ll have to claim that as income at the time.)

While the upfront income tax savings from RRSPs may seem enticing, the fact is that if you’re just early in your career, and therefore making a relatively low income, you’re better off investing in TFSAs. Here’s why:

Let’s say you’re making a fairly low salary – the current national median income is $27,800 – and, you still manage to set aside $1,000 to invest. At the current minimum tax rate of 15 per cent, your tax-savings may only amount to a few dollars. But if you invest that $1,000 in a TFSA, it could grow significantly larger over time. A $1,000 investment that grew at five per cent a year would be worth $4,322 after 30 years.

If your career blossoms and you find yourself earning six-figures one day, you’ll be taxed at a rate of 26–29 per cent, making RRSP deductions a more-valuable consideration.

TFSAs also have another advantage over RRSPs in that you’re able to withdraw the funds whenever you want, without penalty. This makes them a useful savings vehicle for other big expenditures, such as the down payment on a house.

Keep in mind that both RRSPs and TFSAs offer the option of keeping your savings in cash, or investing them further in a GIC or stocks for further interest earning.

Check out this handy graph to learn more about RRSPs vs. TFSAs

4. Retirement Planning – CPP And Beyond

Current Canadian retirees benefit from two government-run pension programs: the Canada Pension Plan (CPP) and Old Age Security (OAS). The maximum monthly CPP payment in 2013 is $1,012.50. The current maximum monthly payment for the OAS is $550.99. Add that up, and you’re looking at $1,563.49. That works out to $18,761.88 a year.

It’s save to say that most of us wouldn’t be able to survive on that alone.
And even that may not be available when you’re ready to retire; in the 2012 budget, the age of eligibility for receiving the OAS was moved from 65 to 67 years of age. This is the first of many anticipated changes to the federal pension programs to deal with the fact that Canadians are living longer, and there may not be enough younger ones in the workforce to support all the baby boomers through a lengthy retirement period. In short, the onus is on young people to plan on financing their own retirement funds.

5. Bonds – The Safe Bet

The downside with investments held within both RRSPs and TFSAs is that they’re tied to stock markets and the overall health of the economy. The general trend has been for these types of investments to grow over time, but major market crashes – such as occurred in 2008 – can have devastating effects on people’s investments. In fact, many Canadians had to modify their retirement plans when the economy tanked and took a good chunk of their nest egg with it.

The principal invested in a savings bond is guaranteed by the government, making them as close to you can get to a sure thing. But that safety comes at a price: the current series of federal savings bonds pay a mere one per cent interest on the first year of the investment. And you don’t get any interest if you cash them in before the year is up.

6. Playing The Stock Market

Investing directly in individual stocks is the area where you can make the biggest gains, or take the biggest losses. But for every seemingly never-ending stock rise (Google’s $85 initial IPO price in 2004 has soared to approximately $1,010 in November 2013) there’s a reminder such as one-time stock market darling Research in Motion of how quickly things can change for the worse. RIM reached a high of more than $140 a share in 2008, but had dipped to less than $14 a share in 2013. You’ll also have to factor in brokerage fees for every transaction you make.

7. Conclusion

Different strategies work for different investors and different situations. An investor might employ more than one strategy, or choose a variety of investment vehicles depending upon their goals.

So, have a plan and a strategy.

Just like going on trip in your car, it is important that investors have a plan and a destination in mind before investing their money. Your goals—whether planning for retirement or buying a home—dictate your time horizon, which dictates your tolerance for risk. Additionally, you want to make sure that you diversify your investments so that some do well when the rest of your portfolio might not. This approach allows an investor to construct a portfolio that is in line with their risk tolerance and that balances potential return with some downside risk protection.

Hopefully this article has provided some insights and good ideas as you invest for your future.

Your journey is just beginning, however, your challenge is to keep learning and stay informed.