3 Common Misconceptions About TFSA’s (Tax-Free Savings Accounts)
3 Common Misconceptions About TFSA’s (Tax-Free Savings Accounts)
Canadians were able to contribute to their Tax-Free Savings Account for the first time on January 1, 2009. Even though this isn’t a new type of account, I get quite a few questions regarding their structures and benefits. Below are the most common misconceptions I see when it comes to TFSA’s:
- “TFSA’s pay 3%, that’s it.”
You may have seen a financial institution advertising that their TFSA’s will provide you with a 1%, 2%, 3% return. This is very misleading to somebody that is unaware of the structure of TFSA’s. First, you need to keep in mind that a TFSA is a type of account, hence “Tax-Free Savings Account”. Second, that you can select what TYPE of investment goes into the account. For example, you can put Equities (Stocks), Bonds (Government, Municipal, and Corporate etc.), Exchange Traded Funds, and certain Option strategies in a TFSA. Your TFSA return is determined by the return of the investment you choose to put in the account. If you put a 1-year GIC into your TFSA paying 1%, your return is only going to be 1%. However, if you buy shares of XYZ Company for $10 and they go to $20, you have a 50% return all tax free! The return you receive on your TFSA can vary depending on the type of investment. TFSA’s don’t just pay a certain percentage.
- “I didn’t contribute the maximum to my TFSA this year. Dang, I lost out.”
Good news! Your TFSA contribution room accumulates if it is not used.
Ex. Suppose you make the following contribution in the respective years…
2009-2014 – No contribution 2017-2020 - No contribution
2015 – $10,000 contribution 2021 - $6,000 contribution
2016 - $5,500 contribution 2022 – How much can I contribute?
In this example, the person would have contributed $21,500 from 2009 to 2021. For 2022, if you have never contributed to a TFSA the total contribution room is $81,500. Meaning, this person could still contribute $60,000 to their TFSA in 2022.
$81,500 (cumulative total allowed to contribute up to 2022)
-$10,000 (2015 contribution)
-$5,500 (2016 contribution)
-$6,000 (2021 contribution)
=$60,000 (total contribution you are allowed in 2022)
|
Year |
TFSA Annual Limit ($) |
Cumulative Total ($) |
|
2009 |
5,000 |
5,000 |
|
2010 |
5,000 |
10,000 |
|
2011 |
5,000 |
15,000 |
|
2012 |
5,000 |
20,000 |
|
2013 |
5,500 |
25,500 |
|
2014 |
5,500 |
31,000 |
|
2015 |
$10,000 |
$41,000 |
|
2016 |
$5,500 |
$46,500 |
|
2017 |
$5,500 |
$52,000 |
|
2018 |
$5,500 |
$57,500 |
|
2019 |
$6,000 |
$63,500 |
|
2020 |
$6,000 |
$69,500 |
|
2021 |
$6,000 |
$75,500 |
|
2022 |
$6,000 |
$81,500 |
Suppose you had to withdraw from your TFSA for some reason. You can add back the amount you took out to what you can contribute the following year. Using our previous example say you made a withdrawal in 2021 instead of a contribution…..
2009-2014 – No contribution 2017-2020 - No contribution
2015 – $10,000 contribution 2021 - $6,000 withdrawal
2016 - $5,500 contribution 2022 – How much can I contribute?
In this example, the person would have contributed $15,500 from 2009 to 2021 and withdrew $6,000 in 2021. For 2022, a total of $72,000 can be contributed.
$81,500 (cumulative total allowed to contribute up to 2022)
-$10,000 (2015 contribution)
-$5,500 (2016 contribution)
+$6,000 (2021 contribution)
=$72,000 (total contribution you are allowed in 2022)
- “Withdrawals from my TFSA are included in my income.”
One of the important benefits of TFSA’s are any withdrawals you make you don’t pay tax on them. As a result, any withdrawals ARE NOT included under your income. Here is a simple acronym to remember what is included in your income…
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Wages, Disability Tax Credits, Rental Income, Royalties, Alimony, Research Grants, Supplementary Income
Want to know more common TFSA misconceptions? Connect with me.
Adam Pukalo, CIM®
Portfolio Manager
Commodity Futures Advisor
T: 306.525.7664
T: 204.982.0010
www.prairiecommodities.com