What is the Tax-Free Savings Account (TFS)?
Introduced in 2009, the Tax-Free Savings Account (TFSA) allows Canadians to save and invest their money on a tax-free basis. This means that all your interest, dividends, distributions and capital gains earned in that account are yours to keep, completely tax-free.
How Much Can I Contribute to the TFSA?
The contribution limits for the TFSA are as follows:
From 2009-2012 they were $5,000
For 2013 and 2014 they were $5,500
For 2015 Mr. Stephen Harper raised it to $10,000!
For 2016 Mr. Justin Trudeau lowered it back to $5,500 🙁
So for anyone 18 years of age or older in 2009, the total contribution room for the TFSA is $46,500!
What Types of Investments Can I Own in a TFSA?
Many types of investments can be held in a TFSA. Stocks, bonds, mutual funds, exchange-traded funds (ETFs) can all be held in one, or a person can use it as a plain vanilla savings account.
In my TFSA I currently hold Canadian dividend paying stocks. For example, I own shares in the Bank of Nova Scotia (BNS), Toronto Dominion Bank (TD) and Manulife Financial (MFC) – all of which I intend to hold for a very long period of time and collect their dividend income on a tax-free basis.
If you want to build wealth then DO NOT use your TFSA as a glorified savings account. At today’s low interest rates you won’t be saving much in the way of taxes on what little interest your TFSA will earn. Why not take a long term view and invest the money for a greater return?
For those interested in using the TFSA to purchase dividend stocks, REITs and ETFs, then I would strongly consider opening a Questrade account. They offer commission-free ETF purchases and you can buy stocks for $4.99 a trade. That’s half price compared to most discount brokerages such as TD Waterhouse. If using a discount broker is not your thing, you can always buy low-cost Tangerine Investment Funds. Either way you will save a ton of money by avoiding high priced mutual fund fees.
What are the Long Term Benefits of the TFSA?
The TFSA is a great long term savings and investment vehicle for those interested in growing their wealth, tax-free over their lifetime. Unlike pension and RRSP income, any withdrawals from the TFSA in retirement are not only tax-free, but they won’t result in any clawbacks on Old Age Security (OAS) or the guaranteed income supplement (GIS).
For more information on the Tax-Free Savings Account (TFSA) see my posts below:
Also check out Gordon Pape’s Tax-Free Savings Accounts: How TFSAs Can Make You Rich on Amazon.