Nine Things You Need to Know About TFSAs
Tax-Free Savings Accounts
Starting on January 1, 2016, you can contribute an additional $5,500 to your Tax-Free Savings Account (TFSA) to benefit from tax-free growth. With the contribution room from 2009 through 2015, you will be able to contribute up to $46,500 to grow tax-free.
Tax-Free Benefits: With a TFSA, you can contribute up to your limit each year ($5,000 for years 2009-2012, $5,500 for 2013-2014, $10,000 for 2015 and $5,500 for 2016), earn tax-free investment income, including interest, dividends and capital gains, and even make withdrawals – at any time, for any reason – without paying tax. Although this may not sound like much at first, with tax-free compound growth, it can add up over time.
Opening a TFSA: All Canadian residents who have reached the age of majority in their province can open a TFSA. The age of majority is 19 in Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, Northwest Territories, Yukon and Nunavut. In all other provinces, it is 18. Bear in mind that you need to have a valid social insurance number to open a TFSA. To open your TFSA, you should ask your bank’s staff for assistance.
Making Contributions: Contribution room accumulates every year starting at age 18 or 19, and can be carried forward indefinitely. You can continue contributing to your TFSA even when you’re retired – it’s a lifelong plan.
Choosing Your TFSA Investments: Regular savings TFSA lets you choose from interest-bearing savings products such as GICs. Full-service TFSA lets you choose from equities such as dividend-paying stocks, most mutual funds and fixed-income investments like bonds, T-bills and GICs. RBC Dominion Securities offers a full-service TFSA. Generally, a full-service TFSA makes most sense if you want to implement a TFSA strategy designed to maximize tax-free compound growth. To learn more about the difference between a regular and full-service TFSA, please ask for our report “Choosing the Right TFSA”.
Making Withdrawals: You can make tax-free withdrawals for any reason, unlike an RRSP. Plus, the amount you withdraw is added back to your available contribution room the following year. Remember that you have to wait to re-contribute any amounts you have withdrawn in any given year until January 1 of the following year. Otherwise, the Canada Revenue Agency may assess excess contribution penalties. In addition, any income or capital gains earned on over-contributions could be subject to 100% tax. There is no requirement to make withdrawals at a certain age. As a result, you can let your investment earnings continue growing tax-free (see chart on next page).
Flexibility: You can use your TFSA to meet a wide range of savings goals – for a major purchase, as an emergency fund, or as a complement to your RRSP or Registered Retirement Income Fund (RRIF) for an additional tax-wise savings strategy.
Transferring Your TFSA: To avoid delays and adverse tax consequences, transfer any TFSA assets held at another financial institution into your RBC Dominion Securities TFSA through a “qualifying transfer” instead of withdrawing and re-contributing. Its staff can help you make a qualifying transfer quickly and easily.
Ways You Can Use Your TFSA
Help children or grandchildren fund their education above and beyond their Registered Education Savings Plan (RESP) and/or family trust
Shelter some of your taxable capital gains, dividends and interest currently being earned in a regular taxable account
Expand your retirement savings beyond your RRSP
Earn tax-free income on surplus RRIF payments that you don’t need immediately
Take advantage of family income-splitting to reduce your overall tax bill by gifting amounts from your bank account (the income from which is exposed to your higher tax rate) to your lower-income spouse or adult children to contribute to their own TFSAs
In provinces and territories where it is permitted, consider naming a beneficiary on your TFSA to avoid probate
Consider naming your spouse as successor holder (instead of beneficiary) on your TFSA to simplify administration upon your death
This publication is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. Interest rates, market conditions, special offers, tax rulings and other investment factors are subject to change. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. © 2015 Royal Bank of Canada. All rights reserved.