Calling it a Tax-Free Savings Account isn’t completely accurate. Yes, you can use it to save cash, but you should also think of it as a way to invest and access your investments gains tax free. You can hold investments like stocks, mutual funds, GICs (guaranteed investment certificates) and the popular ETFs (Exchange Traded Funds).
Your only limit is the amount the CRA tells you. Currently, the maximum for anyone living in Canada who has been 18 years or older since2008 is $95,000 contribution room.
The truth about the TFSA.
While the contributions won’t reduce your taxable income like the RRSP, the TFSA allows you to pull out the gains on your investments without paying any taxes on them. If you contribute $95,000 and a year later it is worth $150,000, you can withdraw it all - tax free.
Your TFSA contribution room is affected by your age and how much you have already contributed to your TFSA. Each year, the TFSA contribution room has been increased by the Canadian government.
Here is a TFSA contribution chart.
I over contributed to my TFSA, now what?
According to the CRA website, you will be charged a 1% fee, per month, on the excess balance.
What can I hold in a TFSA?
What can you hold in a TFSA?
- Cash: This can be uninvested cash that is just sitting in the TFSA, as well as money market mutual funds. No, you cannot hold cryptocurrency like Bitcoin, and Shiba Inu in your TFSA.
- Guaranteed investment certificates (GICs): GICs are a great investment to avoid risk and have a guaranteed interest gain.
- Mutual funds: A mutual fund pools together funds from many other investors to then purchase assets like stocks and bonds. Usually, there is a fee for investing in a Mutual Fund because it’s professionally managed by a fund manager who makes the investment decisions.
- Exchange-traded funds (ETFs): ETFs track, or mimic, various stock indexes, and their units trade on stock exchanges. The are similar to Mutual Funds but have lower management fees. Most self-directed investors will choose an ETF over a mutual fund.
- Bonds (both corporate and government-issued): Investors can buy individual bonds in a registered account, although it is more common to own bonds through a mutual fund or ETF.
- Stocks. You purchase a share to get ownership or ‘stock’ within a company. You can easily do this on platforms like QTrade where you can manage open a TFSA and manage your own investments.
