Tax-Free Savings Account From finiki Jump to: navigation, search Retirement Planning Tax deferred and savings plans Locked-in accounts Registered Retirement Income Fund ((RRIF) Registered Retirement Savings Plan (RRSP) Tax-Free Savings Account (TFSA) TFSAs versus RRSPs Pension plans Pension plans Defined benefit (DB) Defined contribution (DC) DC versus DB pensions Government retirement benefits Government retirement benefits Canada Pension Plan (CPP) Old Age Security (OAS) Guaranteed Income Supplement (GIS) Retirement planning Preparing to retire Annuities Canadian retirement software & calculators Sustainable withdrawal v t e The Tax-Free Savings Account (TFSA) was introduced in the 2008 Federal Budget[1] and accounts could be opened starting on January 1, 2009.[2] Despite the term "savings" in the name of the account, it can also be used for investment, e.g. for retirement. No tax is levied on income or capital gains inside these accounts. There is no tax deduction available for amounts contributed to a TFSA. There are no taxes due when you withdraw money from a TFSA. There are a number of similarities with a Registered Retirement Savings Plan (RRSP), but also some key differences. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits[2], such as Old Age Security, the Guaranteed Income Supplement, and the Canada child tax benefit. Understanding how the over-contribution rules for TFSAs work are very important, as the penalty for over-contributing is significant. Over-contributions often result when a withdrawal has been made. Withdrawals from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year. If you decide to replace or re-contribute all or a portion of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room. If you re-contribute but do not have contribution room, you will have over-contributed to your TFSA in the year. The over-contribution rule continues to catch Canadians unaware.[3] By the end of 2011, approximately 8.2 million Canadians had opened a TFSA, and financial assets held in TFSAs were valued at over $62 billion.[4] In 2013, the annual contribution limit was raised for the first time, to $5500.[5] Contents 1 Who can contribute to a TFSA? 2 Who should contribute to a TFSA? 3 Contribution limits 4 Withdrawals 5 Transfers 6 Over-contributions 7 Eligible investments 8 Foreign withholding taxes 9 Types and offerings 10 Comparisons 11 Questions and Answers from CRA 12 Recommended reading 13 See also 14 References 15 External links 15.1 Brokerages 15.2 Banks Who can contribute to a TFSA? TFSAs are available to residents 18 years and older who have a valid Canadian social insurance number[6]. The initial maximum contribution limit when the program was introduced was $5000 a year; this amount is indexed to inflation in $500 increments (see Contribution limits below). No prohibitions on income splitting apply, so spouses can contribute to their partner's TFSA without eating into their own contribution room, unlike spousal RRSP contributions. And, unlike non-registered accounts, or withdrawals from an RRSP, investment earnings are not attributable to the spouse who supplied the funds. Non-residents can maintain their TFSAs, but no new contribution room is accumulated. Non-residents should not contribute to existing TFSAs, even if they have unused room, as any such contribution is deemed to be an over-contribution and subject to a monthly penalty tax until the contribution is removed or the person becomes resident again in Canada. Who should contribute to a TFSA? Many investors wonder whether a TFSA (no tax deduction for contributions but withdrawals go untaxed) or regular RRSP (which allows a tax deduction on contribution but taxes withdrawals fully) is the best choice. For most people in most situations, using the RRSP is likely to be preferable. However, TFSAs are better for those with low to moderate incomes and/or a need for flexible access to savings. For a more detailed discussion see TFSAs versus RRSPs. Contribution limits The TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500.[7] Year Contribution Limit CPI Unrounded Indexed Amount 2009 $5000 N/A $5000 2010 $5000 1.4% $5000 * (1 + 0.014) = $5070 2011 $5000 0.6% $5070 * (1 + 0.006) = $5100 2012 $5000 2.8% $5100 * (1 + 0.028) = $5243 2013 $5500 2.0%[8] $5243 * (1 + 0.020) = $5348 2014 $5500 0.9%[9] $5348 * (1 + 0.009) = $5396 2015 $5500 1.7%[10] $5396 * (1 + 0.017) = $5488 Unused contribution room, as for RRSPs, can be carried forward indefinitely. Withdrawals Withdrawals are permitted at any time; the amount that is cashed out can be recontributed in a subsequent calendar year. That means, effectively, that growth on the original investment counts toward recontribution room. For example, if the TFSA account is worth $5200 after the first year and the investor withdraws $5100, that $5100 can be recontributed later. Unlike an RRSP or an Registered Retirement Income Fund (RRIF), there is no terminal date for a TFSA before death. At death, TFSA earnings cease to be tax-exempt; there are special rules for spousal transfers. Transfers If you want to transfer funds from one TFSA to another or from one financial institution to another, there will be no tax consequences if your financial institution completes a direct transfer on your behalf.[11] For additional information, contact your financial institution. You should check with both issuers to determine if there are any transfer fees involved, and if so, whether the receiving institution will cover the fees charged by the sending institution. If you withdraw the funds youself and contribute them to another TFSA this could have tax consequences depending on the timing of the withdrawal and subsequent contribution. See Over-contributions. In kind transfers of stock positions from a non-registered account to a TFSA are a valid way to contribute, but such transfers should ideally be done close to the adjusted cost base (ACB). If the price of the transferred security is higher than the ACB, a capital gain will occur and will be taxed. If the price is lower than the ACB, a capital loss will occur but cannot be used to offset gains. These are the same rules as for in kind transfers to RRSPs. Over-contributions One should be aware of how over-contribution, also known as an excess TFSA amount, is defined.[12][13] Withdrawals during the year that are subsequently re-deposited during the year are considered a new contribution. For example, if you contribute $5000 on January 1, withdraw it on January 2, and re-contribute it on January 3, you will be deemed by Revenue Canada to have contributed $10,000 for the tax year. You will be charged a penalty of 1% of the over-contributed amount times the number of months that it was over-contributed - 1% x $5,000 x 12 = 1% x $60000 = $600. None of the examples given clearly show this situation. The TFSA contribution rules[7] state: At any time in the year, if you contribute more than your allowable TFSA contribution room, you will be considered to be over-contributing to your TFSA and you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position. Additionally, as of October 20, 2009, that changed[14] [15]: Finance said that “some TFSA holders are attempting to generate a rate of return” by going over the limit for “a short period of time,” in the belief they can earn more than enough to outweigh the cost of the penalty. To close the loophole, Finance instructed the Canada Revenue Agency to charge a levy of 100 per cent on over-contributions. Carrick has suggested[16] that CRA may be willing to provide relief from the penalties if an honest mistake was made. The appropriate form is RC4288 Request for Taxpayer Relief. Eligible investments Generally, the types of investments that will be permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP).[17]. In general, TFSA rules allow "in kind" contributions and transfers from RRSPs, subject to some eligibility rules and potential tax considerations. Foreign withholding taxes Although US-based Exchange traded funds (ETFs) or stocks can be placed within a TFSA, US taxes will be withheld on distributions. Unfortunately, no Canadian tax credit can be claimed for these taxes. Therefore, US-based stocks and ETFs should generally be placed outside a TFSA. If dividend income from a foreign country is paid to a TFSA, the dividend income could be subject to foreign withholding tax.[17] Types and offerings There are three different types of TFSAs that can be offered: a deposit an annuity contract an arrangement in trust Banks, insurance companies, mutual fund companies, credit unions and trust companies can all issue TFSAs. In addition, a self-directed TFSA can be established at discount brokerages if you prefer to build and manage your own investment portfolio by buying and selling different types of investments such as mutual funds, exchange-traded funds, stocks and bonds. Comparisons This section may require general cleanup to increase readability, focus, or overall clarity. Please improve this article if you can, or talk about solutions on the discussion page. Fees for RRSPs and TFSAs from various suppliers have been compared by Rob Carrick.[18] Current comparisons are available at RedFlagDeals.com When comparing institutions, check very carefully. Start first with your objectives. For example, if you wish to use a pre-authorized purchase plan(PPP) to invest $25/month into TD Monthly Income, you will not be able to use RBC because RBC only offers a $25 PPP on RBC funds. And the product offered by a brokerage may not have the same fee structure as that of the same institution's bank. For example, although both allow one free withdrawal per month, TDWaterhouse charges $25/withdrawal thereafter while TD Canada Trust charges $5/withdrawal thereafter. Questions and Answers from CRA CRA maintains a website with TFSA key topics.[19] Some key topics are listed below. Opening a TFSA Contributions, withdrawals and transfers Types of investments Tax payable on TFSAs Life events Recommended reading Consumers Council of Canada, Tax-Free Savings Accounts: Early Consumer Experiences See also Registered Retirement Savings Plan TFSAs versus RRSPs References ↑ Archived - Budget 2008 - Tax Free Savings Account, viewed February 17, 2012. ↑ 2.0 2.1 Government of Canada, TFSA, Tax-Free Savings Account, viewed Feb. 17, 2009 ↑ TFSA withdrawal rule keeps catching unwitting Canadians - Business - CBC News ↑ Department of Finance, Tax Expenditures and Evaluations 2012: Part 2 - Tax-Free Savings Accounts: A Profile of Account Holders, viewed February 26, 2014. ↑ Department of Finance Canada, Backgrounder: 2013 Tax-Free Savings Account Annual Contribution Limit Increase, viewed November 26, 2012. ↑ Tax-Free Savings Account (TFSA) for Individuals, viewed Feb 5, 2012 ↑ 7.0 7.1 Canada Revenue Agency, TFSA contribution room, viewed July 19, 2012 ↑ Canada Revenue Agency, 2013 indexation adjustment for personal income tax, benefit amounts, and the annual dollar limit for Tax-Free Savings Accounts (TFSAs), viewed December 19, 2013. ↑ Canada Revenue Agency, 2014 indexation adjustment for personal income tax, benefit amounts, and the annual dollar limit for Tax-Free Savings Accounts (TFSAs), viewed December 19, 2013. ↑ 2015 indexation adjustment for personal income tax, benefit amounts, and the annual dollar limit for Tax-Free Savings Accounts (TFSAs), viewed December 8, 2014. ↑ Canada Revenue Agency, Transfers between your own TFSAs, viewed November 26, 2012. ↑ Canada Revenue Agency, Tax payable on excess TFSA amount, viewed November 26, 2012. ↑ Ellen Roseman, Taxpayers hit with penalties on tax-free savings accounts, The Toronto Star, June 12, 2010 ↑ Kevin Carmichael, Ottawa targets abusers of tax-free savings accounts, Globe and Mail, Report on Business, October 20, 2009 ↑ Canada Revenue Agency, Tax payable on an advantage, viewed September 10, 2012. ↑ Rob Carrick, Taxman may forgive TFSA rule breakers, Globe and Mail, Report on Business, June 17, 2010. ↑ 17.0 17.1 Canada Revenue Agency, Types of investments, viewed July 19, 2012 ↑ Rob Carrick, The skinny on fees for tax-sheltered accounts, Globe and Mail, Feb. 21, 2009. ↑ Canada Revenue Agency, The Tax-Free Savings Account, viewed July 19, 2012. External links Canada Revenue Agency, Tax-Free Savings Account (TFSA) for Individuals Canada Revenue Agency, RC4466 Tax-Free Savings Account (TFSA), Guide for Individuals Canada Revenue Agency, Definitions for TFSA Investor Education Fund, Tax-Free Savings Accounts Wikipedia, Tax-Free Savings Account Brokerages BMO InvestorLine CIBC Investor's Edge National Bank Direct Brokerage Questrade RBC Direct Investing Scotia iTRADE TD Waterhouse Banks Canadian Direct Financial Canadian Tire Financial Services BMO Financial Dundee Bank of Canada Tangerine (formally known as ING Direct before April 8, 2014) National Bank of Canada President's Choice Financial RBC Royal Bank Scotiabank TD Canada Trust CIBC Retrieved from "http://www.finiki.org/w/index.php?title=Tax-Free_Savings_Account&oldid=10082" Categories: Personal finance Retirement planning Account types Hidden category: Articles needing cleanup Navigation menu Personal tools Log in Namespaces Page Discussion Variants Views Read View source View history More Search Navigation Main page Navigate site Recent changes Random page Help Glossary Support us Links Financial Wisdom Forum Bogleheads® wiki Bogleheads® forum Quick links for editors Starter`s Guide Guide for contributors Browse categories Wiki cheatsheet Excel to Wiki Sandbox Tools What links here Related changes Special pages Permanent link Page information Print/export Create a book Download as PDF Printable version This page was last modified on 17 December 2014, at 16:20. 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