February 11, 2019
The Tax Free Savings Account (TFSA) was created in 2009 as another incentive for Canadians to save. It is available for Canadian residents with a Social Insurance Number who were of the age of majority in 2009 (18 or 19 years of age) in your province or territory of residence. Canadians can contribute up to a certain amount to their TFSA’s each year. Unlike RRSP’s where your contribution room is based on your earned income, you receive your TFSA contribution room each year. As of 2019, the annual amount was increased to $6,000 per year. Contribution room carries forward each year and for 2019 the lifetime contribution limit is $63,500. Any interest, dividends or capital gains earned inside of a TFSA are sheltered from tax.
I can’t tell you how many times I have come across investors who assume the only investments they can hold in their Tax-Free Savings Account are GIC’s or savings accounts. Many of these investors are dealing with the banks who would prefer that the investing public only consider these 2 options for their TFSA’s. Perhaps a better name for these savings vehicles should be a Tax-Free Investment Account since “savings” account misleads Canadians to only consider the 2 options above. In fact, a TFSA can hold a variety of investments including Cash, GIC’s, Mutual Funds, Stocks, Bonds, or Exchange Traded Funds (ETF’s).
Ideally an investor would like to look at an investment option that has the potential to earn the highest dividend or interest payment or the potential to grow the most. This would maximize the benefit of this tax shelter. If you contribute to a TFSA and the money stays in cash or savings earning less than 0.25%, there is very little income earned and therefore the TFSA is offering little benefit. If you invested in a stock with a high dividend in the 4% to 6% range, then the TFSA is providing more bang for the buck. It is best to work with a professional financial planner to determine a suitable investment option for your TFSA.
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