I called TD Waterhouse to understand the advantages of a TFSA. I learned that they were changing their name to "TD direct investing", its a good idea too as it makes more sense.
I learned that when you "over contribute" in your TFSA you must pay a 1% interest fee per month on the "excessive amount" for example:
to date you can have $20,000 in your tax free savings account with no penalty
if you have $30,000 in the tax free savings account, then you over "contributed" by $10,000.
The excessive amount being $10,000 will be taxed 1% per month. If that money was sitting into your TFSA for 12 months:
10,000*1%= $100*12 months= $1,200 you would own the government in taxes.
I learned a few things from my phone call:
1) you can over-contribute if you desire but it will be taxed "1%" per month
2) when your "over-contributed" amount of cash is invested, the gains on that "excessive amount" will not be taxed, only the contributed amount of $10,000 will be taxed, for exampe: if the over-contributed amount bought you 10,000 cuu shares, which say at 5$ per share is a investment income gain of $50,000....THIS WILL NOT BE TAXED OR PENALIZED! I didnt know that.
3) your investment income is not taxed in a TFSA, which is obivous but what I learned that is more intriguing is thegrowth of your investment incomeis not taxed either. An example is, you make $50,000 from cuu, you then invest that $50,000 in another stock and make $200,000 that will be all TAX-FREE growth aswell from what I was explained.
This is from TD waterhouse website when I researched TSFA details:
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You have a flexible option to help you save money: the Tax-Free Savings Account (TFSA). This registered savings account lets Canadians take advantage of tax-free savings.
With a TFSA, you can –
- Pay no tax on the investment income and growth you earn in the account
- Withdraw your money any time1 and pay no tax on withdrawals
- Contribute up to $5,0002 a year
A TFSA is a great way for you to save for your short- or long-term goals. Whether you’re putting money aside for a down payment on a house, opening a business or making sure you have enough for a comfortable retirement, a TFSA can help.
The Benefits of a TFSA
There are four main benefits to a TFSA:
1. Tax-free growth
You pay no tax on the investment income or growth generated in your TFSA. This tax-free growth can help you build your savings faster.
2. Tax-free withdrawals
You can make withdrawals when you want1 your money and not pay any tax. That makes the TFSA suitable for both short- or long-term savings, and also gives you flexible access to your money if an unexpected need arises.
3. The ability to put back any amounts you withdraw
You can re-contribute amounts that you withdraw3 beginning in the year after you withdraw them. In addition, your unused contributions are carried forward indefinitely. You can contribute any or all of your accumulated contribution room whenever you want, at any point in your life.
4. Income splitting
Although you can’t contribute directly to your spouse’s or common-law partner’s TFSA, you can give or loan them money which they can then contribute to their own TFSA. This allows you to effectively split income, and any income your spouse or common-law partner earns in their TFSA would not be attributed back to you.
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About TFSA
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Q: What is a Tax-Free Savings Account (TFSA)?
A: A Tax-Free Savings Account (TFSA) is a new kind of registered account recently announced by the government. Through a TFSA, you can put your savings into eligible investments and not pay tax on the investment income you earn.
Q: Who is eligible for a TFSA?
A: The idea behind TFSAs is to make the benefits of tax-free savings available to as many Canadians as possible. For that reason, TFSAs are available to every Canadian resident who is 18 years of age or older and has a Social Insurance Number (SIN).
However, at TD, you must have achieved age of majority in order to open a TFSA. So, if you live in British Columbia, Newfoundland and Labrador, Nova Scotia or New Brunswick, then you can’t actually open a TFSA until you are 19, which is the age of majority in those provinces. However, you will accumulate contribution room from the time you are 18.
Q: When can I open a TFSA?
A: As of January 2009, you’ll be able to open a TFSA throughTD Waterhouse.
Q: How is a TFSA different from an RSP?
A: An RSP is designed specifically to provide you with income after you retire. Your contribution limit is based on your income and the contributions you make are tax-deductible, but you do pay tax on the money when you receive it as income.
A TFSA is not designed specifically for retirement, but to help you save money for a wide range of goals. The amount you can contribute is not based on your income and your contributions are not tax-deductible. You can withdraw your money any time you want it, and you don’t pay tax on those withdrawals. You also don’t lose contribution room when you make a withdrawal – you can recontribute that amount to your TFSA the following year or any year after that.
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Contributions
Q: How much can I contribute?
A: As of January 2009, you can contribute up to $5,000 a year to your TFSA. However, that contribution limit is indexed to inflation, which means that it will rise with the cost of living.
Q: What if I can’t contribute the full $5,000?
A: You can carry forward any uncontributed amounts into future years indefinitely. So, for example, if you contributed only $2,000 in 2009, in 2010, you could contribute up to $8,000 (the $5,000 limit for 2010, plus the $3,000 you had left over from 2009).
If, in 2010, you had only $5,000 to contribute, you could carry the $3,000 left over from 2009 to 2011 and on through the years until you use it.
Q: How will I know what my contribution limit is for each year?
A: Every year, the government will calculate how much TFSA contribution room you have available. You will be informed of your contribution limit when you receive your T1 Notice of Assessment.
Q: Can I contribute more than my limit in a particular year?
A: If you contribute more than your contribution limit, you will pay a penalty of 1% per month on the excess amount.
Q: Can I make spousal contributions to my spouse’s TFSA?
A: No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RSP. However, you can give your spouse money, which they can then contribute to their own TFSA. Any income your spouse earns on the money in their TFSA is theirs and will not be attributed back to you.
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Withdrawals
Q: When can I withdraw my money?
A: You can withdraw funds from your TFSA any time you want – you don’t have to reach a certain age before you withdraw your money.
Q: Do I have to pay income tax on my withdrawals?
A: No, you don’t have to pay tax on the amounts you withdraw.
Because TFSA withdrawals don’t count as taxable income, they don’t affect Federal income-tested benefits or tax credits you may receive, including the Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit and the Age Credit. TFSA withdrawals also won’t reduce benefits based on your income level, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits.
Q: What can I spend the money on?
A: Anything you want. You could wait until you retire and use it to supplement retirement income you have from pensions, RSPs or other sources, but you can also use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home.
Q: Once I’ve withdrawn my money, is that contribution room lost?
A: No, you never lose your contribution room – in fact, you can recontribute amounts you have withdrawn. You have to wait until the next year to recontribute, but you can carry forward the recontribution room indefinitely.
For example, say you contribute $5,000 to your TFSA in January 2009 and another $5,000 in January 2010. Then, in the summer of 2010, you withdraw $3,000 to pay for some repairs to your home. You can’t recontribute that $3,000 in 2010, but in 2011 it will be added to your contribution room again, meaning you could contribute up to $8,000 in 2011.
Q: Are there any restrictions on withdrawals?
A: No, you can take out as much of your money as you want, whenever you want, and use it for anything you choose.
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Taxation
Q: Do I have to pay tax on my money?
A: No, you don’t pay any tax on the investment income you earn in the account, and you don’t pay income tax on the amounts you withdraw.
Q: Are my contributions tax-deductible, like RSP contributions?
A: No, you can’t deduct contributions to your TFSA from your income as you can with your RSP contributions.
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Investments
Q: What kind of investments can I hold in my TFSA?
A: You can hold many of the same investments you hold in your RSP in your TFSA, including mutual funds, GICs, stocks and bonds.
Note: The above information about the Tax-Free Savings Account is based on the information currently available from the Canadian government. To learn more or to check for updates, visit the TFSA information pageon the Canada Revenue Agency website.
