The TFSA has become a very popular savings and investing vehicle over the past decade, allowing investors to generate tax free investment income and capital gains. Many investors use the TFSA for more shorter-term financing goals, like buying a house or saving for a vehicle. However, the TFSA is now a major piece in an investment plan for retirement. Here is a quick breakdown of the TFSA:
- As of 2024, the contribution limit is $7,000 per year, an increase of $500 compared to 2023. Assuming you were 18 in 2009 when the TFSA was introduced, you have $95,000 of total contribution room including 2024 contribution room.
- In general, a TFSA is allowed to hold the same investments as a registered plan. This means publicly traded stocks and ETFs are allowed along with mutual funds and bonds.
- If you own US securities in a TFSA, there are withholding taxes on distributions.
- There are no tax implications to pull money out of a TFSA, because you are using after tax dollars to contribute.
- Investment income and capital gains are non-taxable in the TFSA.
As you can see, with $95,000 in contribution room, the TFSA has become a significant part of a financial plan. Allowing capital to compound at tax free rates can really add up to a significant sum, so we suggest that investors utilize the TFSA for financial goals, short or long term. There has been much debate about whether an investor should choose a TFSA or RRSP, and the most straightforward answer is, it depends on the individual’s circumstances. In many cases, a combination of both is a great approach.