TFSA - how to think about tax issues?

Nov. 28, 2019

Introduction

I was confused about TFSA about tax issues after I read Canada government website. So I continued to do research, I found a good article to explain tax issue very clearly. 

TFSA - tax issues

Here is the article. 

With a tax-free savings account (TFSA), you can grow your money with various kinds of investments, including bonds, stocks, mutual funds and exchange-traded funds – not just cash. Your investment return could potentially be in the high single- or even the low double-digits, if your investments perform well. Or you could lose money, if they don’t. Just keep an eye on your contribution limit, which currently stands at $5,500 per year (and rises to $6,000 per year in 2019), in addition to whatever you had withdrawn from your TFSA in an earlier year and are now re-contributing. Unlike RRSP contributions, your TFSA contributions aren’t tax deductible. But because you’ve already paid income tax on the money you put in your TFSA, you won’t have to pay tax when you take it out. And any investment income you earn won’t be taxed – not even when you take the money out of your TFSA.

While a TFSA offers tax-free growth, the restrictions on the investments you hold in it might mean it will take a few days to withdraw your money. This could be highly inconvenient if the rain is pouring through the hole in your roof in the meantime, or your car has broken down hundreds of miles from home.

To cover such situations, you could keep some money in a high-interest savings account. While these don’t offer the growth potential of a TFSA because you can’t hold investments in them, they do pay slightly more interest than an ordinary savings account. The interest you get depends on your bank and your balance. Since your money isn’t locked in, it’s much easier to get at when you need it. Unlike a TFSA, there’s no limit to the amount you can put in a high-interest savings account, but you do have to pay income tax on the interest you earn. Note that you can have a registered high-interest savings account itself as a TFSA, in which case TFSA contribution limits and tax treatment apply.

Not sure what’s right for you? An advisor can help you decide which savings option (it could be more than one) can help you grow your money during good times and have it on hand when hard times come along.