Imagine a world where you don't have to pay tax on any income you earn. Every pay cheque you receive at work will have no 20% plus deduction from that salary you work so hard to earn every pay period. Well unfortunately, we don't live in such a utopia. Fortunately, the Government of Canada introduced an investment vehicle back in 2009 that allows you to invest freely within this account and pay absolutely no income tax on your investment gains. Yes this is the Tax Free Savings Account, or TFSA.
The TFSA is an investment vehicle, or simply an account, where an individual can invest his or her money without the worry of paying income tax on any gains when the money is pulled out of the account. This is contrary to an RRSP account where the amount of money taken out of the account during a given year is counted as "income" and you are taxed accordingly to the income bracket you fall under.
Implemented in 2009, the TFSA is available to anyone over the age of 18. Every year, you are allowed to put in up to the max contribution limit for that year. This limit accumulates year over year. Below is a chart outlining the TFSA maximum contribution limits for every year starting in 2009:
FIGURE 1: TFSA Max Contribution Limits Since 2009
If you had turned 18 before or during 2009, you were allowed to contribute a maximum of $5,000 into your TFSA for the year of 2009. The same logic follows for the concurrent years. If you do not put money into your TFSA one year or don't fill it up to the maximum, that leftover contribution room is simply carried over to the next year, and so on. If Bob was 18 years or older in 2009 and has not contributed to his TFSA at all for the past 8 years, in 2017 he has room to put up to $52,000 to "fill" up his TFSA.
If an individual turns 18 after the year 2009, their contribution limit would start accumulating that same year they turned 18 in. If Jim turned 18 in 2013, today in 2017 he would have a cumulative contribution room of $32,000.
Make sure you DO NOT contribute past your max contribution limit or you will get penalised (the CRA website goes into detail about the penalties.. just know that the penalties suck alot!).
You can have more than one TFSA account. For example, you can have a TFSA account at your bank, and you could also have a TFSA account in your online brokerage account. Just make sure that the total amount contributed to both accounts does not exceed your contribution limit.
The nice thing again with this investment vehicle is that its TAX FREE. Any returns on investments in your TFSA will not get taxed when you pull the money out. Also, you are allowed to freely take money out and put money back in to your TFSA without being penalized. Remember that the same amount you take out of your TFSA can be put back in (since you are essentially freeing up contribution space). So the beauty about this is that this rule applies to money that has grown. For instance, if Jim invests $5,000 in his TFSA (say in the stock market) and makes 20%, he now has $6,000. If Jim decides to pull out that $6,000 from his TFSA, he actually has $6,000 of free contribution space now even though he only put in $5,000 to begin with. But the opposite is true too. If Jim initially put $5,000 into his TFSA and bought a poor investment and returned a -20% loss, he would now have $4,000 dollars. If he decides to pull this $4,000 out of his TFSA, he can only put back in $4,000, even though he initially put in $5,000.
A TFSA account can easily be set up at your local bank, where you can put your money into any sort of investments such as Mutual Funds, GICs, government bonds, stocks, or other fixed income and marketable securities. You can also set up a TFSA account (instead of or in addition to the one at your financial institution) through an online broker. Personally, I don't have any money in my TFSA account at my bank. I have a TFSA account set up through my online broker where I manage a portion of my stock portfolio (visit the Performance page to see the monthly returns for the TFSA account).
TFSAs are an extremely useful tool that can be used to grow and compound your investments tax free.... so why wouldn't you take advantage of it? However, there are many people who under utilize this investment vehicle or simply aren't aware of the perks it has to offer. The TFSA is your best friend, so familiarize yourself with it and make it work for you... that's what best friends are for right?