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What Is a TFSA?

Updated: Oct 11, 2023


Excessive financial jargon often leads to confusion and anxiety regarding the topic of investing. For beginner investors, getting comfortable with the basic terms thrown around in the world of finance is a useful first step to starting your investing journey. A great starting point is to learn more about the Tax-Free Savings Account or TFSA for short.


A TFSA is a type of registered account, which is extremely popular among long-term investors for its tax benefits. The account is designed to help Canadians save and invest their money, tax-free, throughout their lifetime. Money contributed to a TFSA can be saved and invested for any purpose, whether that be saving for a new home, education, retirement, a new vehicle, or a rainy-day fund. This depends on your goals as an investor, and the good news is that you have complete freedom to use the money you’ve contributed to a TFSA for any goal or objective.



Eligibility Requirements

To be an eligible account holder, you must be a Canadian resident with a valid SIN and have reached the age of majority in your respective province or territory. In provinces with an age of majority of 18, you may open and contribute to a TFSA once you turn 18. In provinces where the legal age is 19, you must wait until you turn 19 years old to contribute, but you will have accumulated the applicable contribution room for the previous year as well. Meaning that the total contribution room available to investors of the same age will be identical no matter their respective province/territory.



Contributions

Given the tax-advantages of contributing to a TFSA, there are rules set out by the government that restrict investors to a yearly maximum. For 2023, individuals can contribute a maximum of $6,500 to their account. This amount will accumulate for every year beginning when the investor turns 18, which includes provinces/territories where the legal age is 19. Any amounts over that will be subject to a 1% tax for every month the excess amount remains in your account.


Lifetime Contribution Limits: These are based on the year in which you turned 18 years of age. Every subsequent year after that, your lifetime limit will increase based on that year’s dollar limit. The chart below shows the annual limits since the TFSA was introduced in 2009:

TFSA dollar limit for every year since its introduction in 2009

For Example: If you turned 18 years old in September of 2018: You would have accumulated $36,000* of contribution room in your TFSA at the start of 2023. Anyone 18 years or older in 2009, would have accumulated $88,000** in contribution room. The annual limit is indexed to inflation and rounded to the nearest $500, which is why we have seen periodic increases of $500.

* calculated as the sum of the TFSA dollar limit since 2018

** calculated as the sum of the TFSA dollar limit since 2009



What to do with contributions?

Saving and investing money are two distinctly different things. The first step is to carefully plan and budget your expenses, so you can save some of your income every month. What to do with these savings is completely up to you, and even once your savings are inside a TFSA, you will need to make decisions regarding how you want that money invested. TFSAs allow for a wide range of investments that can be held inside your account.


These include:

- Cash

- Mutual Funds

- Securities listed on a designated stock exchange

- Guaranteed Investment Certificates (GICs)

- Bonds

- Certain shares of small business corporations


Investing inside a TFSA in any one of the listed options above yield the potential for gains or losses on your contributions. If your investments perform well, and you experience a gain, this will not affect your contribution limit for subsequent years.


For Example: If you contributed the annual maximum of $6,500 this year, and you invested that money in a mutual fund and it gained in value to $7,000, the $500 growth will not reduce your contribution limit for next year. Additionally, the $500 in growth is completely tax-free, so when you decide to make a withdrawal from your TFSA, you will not incur any taxes as a result of the gain. Making tax-free withdrawals can have enormous benefits for investors who have maximized their TFSA contributions and invested that money appropriately.


Making investment decisions can be difficult, as there are plenty of factors that must be considered. It’s important to speak with an advisor to get a personalized plan built to suit your goals and objectives. Contacting a Bastion Wealth Advisors Group Advisor is easy and can alleviate any anxiety associated with investing. No question is bad, and we are always happy to welcome new clients to our team.


To inquire about opening a TFSA with us, please click on the button below:




 

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Source: Government of Canada, (January 2023). Tax-Free Savings Account (TFSA), Guide for Individuals. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html#P44_1111




iA Private Wealth Inc. is a member of the Canadian Investor Protection Funds and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

This information has been prepared by Mike Holyk who is a Senior Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.



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