Are There Any Tax-Free Savings Accounts?

Tax-free savings accounts (TFSAs) are the best way for individuals to save towards their financial goals. The capital gains and investment income earned from TFSAs are usually free from tax. As a result, it gets easier to save money for short-term and long-term goals. In addition, these accounts complement other saving plans such as Registered Education Saving Plans (RESPs) and Registered Retirement Savings Plan (RRSPs). TFSAs are similar to PRSPs since the account holders have the opportunity to invest in one or more products including Guaranteed Investment Certificates (GICs), government bonds and mutual funds. Start searching for local TFSA options:

Find a Tax Free Savings Accounts

Are there any tax-free savings accounts? Yes! Tax-free savings accounts exist to enable individuals to save for short and long-term financial goals such as education, a down payment for a mortgage, or a vacation. All the income earned from these accounts is usually tax-free, and unlike an RRSP, one does not receive a tax refund for any contributions made. With tax-free savings account, you can easily grow your savings much faster as a result of the compounding process. TFSA are federally insured, which means up to $250,000 of the money in your account would be covered if the bank failed.

There are two types of tax-free savings accounts: a regular TFSA account (a deposit account, annuity contract, and an arrangement in trust) and a self-directed TFSA account. A regular account is opened with a financial institution, and the investment options are restricted by the proprietary options of the financial institution. Self-directed TFSAs offer investment opportunities which are not accessible to regular accounts. The accounts enable individuals to invest in all qualified investment options including mutual funds, publicly traded shares, small business corporation shares, bonds, royalty units, debt obligations, and mortgages. The different accounts can be issued by banks, credit unions, insurance companies, or trust companies.

How to Choose One

When opening a tax-free savings account one should select a bank that has account insurance. This type of account lets you grow tax-free investment income (i.e., interest, dividends, and capital gains) earned on the contributions made using already taxed income. The target group for TFSAs includes individuals from all income levels, i.e. young adults saving for a special project; individuals having reached RRSP contribution limits who are seeking an alternative tax-sheltered savings vehicle; and retirees who don’t need all of the retirement income.

The dollar limit for applying TFSA is $5,500 as of 2017; this limit is indexed annually and rounded off to the nearest $500). It would be wise to opt for a TFSA rather than a traditional non-registered savings plan since the returns are tax-free and available when they need them.

Benefits of Tax-Free Savings Accounts

A tax-free savings account has several benefits.

  • Growth of the investments is tax-free: You will not pay taxes on the interest, dividends or capital gains earned.
  • Tax savings allow the TFSA to grow faster than a taxable investment account.
  • Flexibility to withdraw your savings at any time and for any purpose you choose.
  • Awide range of investment options including mutual funds, guaranteed investment certificates (GICs), stocks, bonds, and cash.

A major challenge of owning TFSA account, however, is the fact that this account is only recognized in Canada; the US Government doesn’t officially recognize it, and as such US-company dividends received in your TFSA would be subject to a 15% withholding tax.

How to Open One

To open a TFSA account, you are expected to contact your financial institution, insurance company, or credit union then provide the issuer with details (date of birth and social insurance number) for registering you for a TFSA. There are several benefits of TFSA. First, any amount withdrawn from the tax-free savings accounts can be re-contributed in future years without reducing contribution room. Another one of the advantages is that spouses (and common-law partners) can give each other money to contribute to their own TFSA as long as it is within the maximum allowed. TFSA assets can be transferred to a spouse tax-free upon death.

The annual TFSA contribution limit for each individual (18 years of age and older) is set at $5,500 for 2018. From 2009 to 2012, the annual maximum contribution limit was $5,000, $5,500 from 2013 to 2014, $10,000 for 2015, and $5,500 for 2016. Any withdrawals made in a calendar year will create additional contribution room the following year. For example, an individual contributing $200 a month to a TFSA for 20 years (assuming an average annual return of 5.5 percent) will accumulate about $11,045 more in savings than if the investment had been made in a non-registered account.

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