Calling all TFSA Account Owners
By PAIP Canada staff
Only a few days ago millions of Canadians flipped the calendar into the new year which meant something different for everyone. For those in the financial industry, it meant the Tax-Free Savings Account (TFSA) annual limit increased to $6,500 and new First-Home Savings Account (FHSA) was introduced.
With this latest increase, the lifetime annual limit has increased to $88,00 for all Canadians who were at least 18 years old by December 31st of 2009, even if they’ve never opened a TFSA.
In addition, for those who made withdrawals during the past calendar year, these amounts will be returned to them on January 1st.
As a reminder, the TFSA is a registered plan that allows for the tax-free savings, growth, and withdrawal of amounts for Canadians, up to a specified maximum amount. What started with a $5,000 limit in 2009 has grown to allow for up to $88,000 to be deposited and withdrawn without tax ramifications. For many younger Canadians, the attractiveness of the TFSA has far outweighed the Retirement Savings Plan (RSP) due to the easier access of the funds deposited.
Unlike withdrawals from RSP plans (which are subject to tax), withdrawals from TFSAs have no tax consequence as the original deposits provided no tax benefit. The main difference between these two plans is the balance invested can either be pre-tax (with RSP plans), or post tax (with TFSA plans).
Since amounts contributed into an RSP plan provide a tax deduction (which reduces one’s taxable income), then withdrawals will eventually have to be taxed when they occur, either from the RSP plan or a Retirement Income Fund (RIF).
Regarding TFSA plans, since the amounts deposited provided no tax deduction, the amounts are considered after-tax money. This way, withdrawals are not subject to tax.
For those seeking a hybrid of these plans, the closest options would be the FHSA plan which is available to those considered first time home buyers only – an interesting topic for next week.