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The Ins and Outs of a Tax-Free Savings Account: What You Need to Know

The Ins and Outs of a Tax-Free Savings Account: What You Need to Know

Are you looking for a way to grow your money without worrying about taxes eating away at your earnings? Look no further than the tax-free savings account (TFSA). This powerful investment tool is perfect for Canadians who want to save and invest their hard-earned dollars while minimizing their tax burden. But how exactly does it work, and what are the rules and regulations governing TFSA contributions and withdrawals? In this post, we’ll dive deep into the ins and outs of TFSAs so you can make informed decisions about how to leverage this valuable financial instrument.

Introduction to Tax-Free Savings Accounts

A Tax-Free Savings Account (TFSA) is a savings account that is exempt from taxation. This means that any interest earned on the account is not subject to taxation. TFSAs were introduced in 2009 and are available to Canadian residents who are 18 years of age or older.

The main advantage of a TFSA is that it allows you to grow your savings tax-free. This can be a significant advantage if you are in a high tax bracket and/or expect to be in a higher tax bracket in the future. For example, if you are in the 30% marginal tax bracket and earn $100 of interest on your TFSA, you would normally have to pay $30 of taxes on that interest. With a TFSA, you would get to keep the entire $100.

There are also no limits on how much you can contribute to your TFSA. However, there is an annual contribution limit which is currently $5,500 per year (for 2018). Any unused contribution room can be carried forward to future years.

Withdrawals from a TFSA are also tax-free. You can withdraw money from your TFSA at any time for any reason without being taxed on the withdrawal. And, if you withdraw money from your TFSA, the withdrawn amount will be added back to your contribution room for future years so that you can re-contribute the money at a later date without penalty.

One final advantage of a TFSA

Benefits of Investing in a TFSA

When it comes to saving money, a Tax-Free Savings Account (TFSA) is a great option. Here are some of the benefits of investing in a TFSA:

• Your investment grows tax-free. This means that any interest, dividends, or capital gains earned on your investments are not subject to taxation.

• You can withdraw money from your TFSA at any time, for any reason, without having to pay any taxes on the withdrawal.

• You can re-contribute any amounts withdrawn from your TFSA back into the account in the future without having to pay taxes on those contributions.

• There is no limit on how much money you can contribute to your TFSA each year. However, there is a lifetime contribution limit of $5,500 per person (as of 2013).

• TFSAs provide flexible savings options for people of all ages. For example, you can use a TFSA to save for a short-term goal such as a vacation or a new car, or you can use it to save for a long-term goal such as retirement.

How to Open a TFSA

A Tax-Free Savings Account (TFSA) is a great way to save money for short- or long-term goals. You can contribute up to $5,500 per year (or $6,000 if you’re over age 18), and your contributions are not taxed. With a TFSA, you can save for anything – a new car, a down payment on a house, your child’s education, or even your own retirement.

The good news is that opening a TFSA is easy – you can do it at most banks and financial institutions in Canada. Just bring your Social Insurance Number (SIN) with you, and they’ll take care of the rest.

There are a few things to keep in mind when you open a TFSA:

First, you need to be 18 years of age or older. If you open a TFSA before you turn 18, any contributions you make will be subject to taxes.

Second, there is no limit to how much money you can contribute to your TFSA over your lifetime – but there is an annual contribution limit. For 2019, the contribution limit is $6,000. If you contribute more than this amount in any given year, you will be subject to taxes on the excess amount.

Third, the earnings on your investments (interest, dividends, and capital gains) are all tax-free. This means that your TFSA can grow much faster

Types of Contributions and Withdrawals for TFSAs

There are two types of contributions that can be made to a TFSA: regular and catch-up. Regular contributions can be made at any time during the year, up to the maximum contribution limit for that year. Catch-up contributions can be made if you have not reached your maximum contribution limit in previous years, and can be made until you turn 71 years old.

Withdrawals from a TFSA can be made at any time, for any reason, without penalty. However, it is important to note that withdrawals will reduce your available contribution room for future years.

Eligibility Requirements for a TFSA

To be eligible to open a TFSA, an individual must:

-Be a Canadian resident aged 18 or older
-Have a valid Social Insurance Number (SIN)

In order to contribute to a TFSA, an individual must have earned income from:

-Investment income
-Alimony or maintenance payments

Contributions can be made by an individual or their spouse/common law partner.

How to Track Your Contributions and Withdrawals

When it comes to a Tax-Free Savings Account (TFSA), there are a few things you need to keep in mind in order to make the most of this type of investment account. One of the most important aspects is tracking your contributions and withdrawals, as this will ensure that you stay within the contribution limit and do not face any penalties.

There are a few different ways that you can track your contributions and withdrawals. The first is to simply keep a running total in a notebook or on a spreadsheet. This can be a bit tedious, but it will allow you to always know exactly how much money is in your account and how much room you have for additional contributions.

Another option is to use the online tools provided by your financial institution. Many banks and credit unions offer online banking platforms that include features like TFSA contribution tracking. This can be a convenient way to stay on top of your account without having to do all the calculations yourself.

Finally, there are a number of third-party apps that can help you track your TFSA contributions and withdrawals. These apps typically link directly to your financial institution’s online banking platform, making it easy to see all of your information in one place. Some popular options include Mint and YNAB.

Whichever method you choose, tracking your contributions and withdrawals is essential for maximizing the benefits of your TFSA. By staying aware of how much money is going into and out of your account, you can avoid

What Happens If You Exceed the Contribution Limit?

If you exceed the contribution limit for a Tax-Free Savings Account (TFSA), you will be subject to a penalty tax. The penalty tax is equal to 1% of the highest excess TFSA contribution for each month that the excess contribution remains in your account. For example, if your excess contribution is $500 and it remains in your account for two months, you will be required to pay a penalty tax of $10.

Alternatives to TFSAs

There are a few alternatives to TFSA accounts, each with their own unique benefits. For example, the Registered Retirement Savings Plan (RRSP) is a great option for those who want to save for retirement. The RRSP offers a tax deduction on contributions, and all earnings grow tax-free until withdrawal. However, withdrawals from an RRSP are taxed as income. Another alternative is the Registered Education Savings Plan (RESP), which helps families save for a child’s post-secondary education. The RESP offers a 20% government grant on contributions, and earnings grow tax-free until withdrawal. Withdrawals from an RESP are taxed as income.


The Tax-Free Savings Account is an excellent way to save money and keep it safe from taxation. Knowing the ins and outs of this account, including eligibility requirements and how contributions are made, will help you make the most of your savings. With tax-free interest rates available on TFSA accounts, there’s never been a better time to open one up and start saving for your future.


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