Understanding Tax-Free Savings Accounts (TFSAs)
A Tax-Free Savings Account (TFSA) is a flexible and efficient way to save and invest your money. It allows your investments to grow without being taxed, providing a significant advantage for Canadians looking to maximize their savings. Here’s what you need to know about TFSAs:
- Allows all of your investments to grow tax-free throughout their lifetime
- Any Canadian resident age 18 or older with a Social Insurance Number can open a TFSA
- You can carry forward unused contribution room indefinitely
- There is no tax deduction for contributing
- The returns your investments generate (interest, dividends or capital gains) are completely tax free
- The No-Fee Tradex TFSA allows members to invest in any of the three Tradex Mutual Fund options, or our Tradex Investment Savings account
- The Canada Revenue Agency will track your contribution room and report this amount through the “My Account” function on the CRA web site
TFSA Contribution Limits
Year | Contribution Room |
|---|---|
2009 – 2012 | $5,000 |
2013 – 2014 | $5,500 |
2015 | $10,000 |
2016 – 2018 | $5,500 |
2019 – 2022 | $6,000 |
2023 | $6,500 |
2024 | $7,000 |
2025 | $7,000 |
Total | $102,000 |
TFSA or RRSP?
Choosing between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) is essential for your financial planning. Both accounts offer unique benefits, and understanding their differences can help you make the best choice for your savings goals. The table below illustrates the after-tax return of $36,500 of income earned by an individual who invests for a 25-year period, assuming a 5% rate of return. This example depicts the result of taxation at the same rate, at a lower rate, and at a higher rate during an individual’s retirement years versus their working years.
Same Tax Rate | Lower Tax Rate | Higher Tax Rate | |||||
|---|---|---|---|---|---|---|---|
TFSA | RRSP | TFSA | RRSP | TFSA | RRSP | ||
Pre-Tax Income | $36,500 | $36,500 | $36,500 | $36,500 | $36,500 | $36,500 | |
Tax Rate – contribution | 40% | 40% | 20% | ||||
Tax | $(14,600) | – | $(14,600) | – | $(7,300) | – | |
Net Contribution | $21,900 | $36,500 | $21,900 | $36,500 | $29,200 | $36,500 | |
Growth @ 5% for 25 years | $74,161 | $123,602 | $74,161 | $123,602 | $98,882 | $123,602 | |
Tax Rate – withdrawl | 40% | 20% | 40% | ||||
Tax | – | $(49,441) | – | $(27,720) | – | $(49,441) | |
Net Cash | $74,161 | $74,161 | $74,161 | $98,882 | $98,882 | $74,161 | |
Still Not Sure Which Option Is Best for You?
Book a free consultation today to explore which option best suits your financial goals.