The TFSA was created by the Canadian government in 2009 to give Canadians the incentive to save and invest without paying taxes on the growth. Although it is known as a Tax-Free Savings Account, a better name for it would be a Tax-Free Investment Account since the money within a TFSA can actually be invested in all kinds of investment products such as:
- Savings accounts
- Mutual Funds
- Individual stocks
The benefit of the TFSA is that the growth of the investments within it is tax-free. You will not pay taxes on the interest, dividends or capital gains earned. The tax savings allow the TFSA to grow faster than a taxable investment account. You can also withdraw the funds within your TFSA at any time without any tax implications, making it ideal for short or medium-term objectives. Better yet, the money you withdraw will be added back to your contribution space starting in the next calendar year.
Although the tax-free status of the TFSA is recognized in Canada, the US Government doesn't officially recognize it, so US-company dividends received in your TFSA are subject to a 15% withholding tax. Don't worry, we take care of those for you so there's no effort needed on your end or any paperwork to file with the IRS.
Additionally, a withdrawal from a TFSA has no impact on current contribution room. However, to put back the withdrawn amount in your TFSA within the same year, you need to make sure you have enough contribution room left this year OR wait until the next calendar year.
For example, if I have $30,000 in a TFSA and my total contribution room is $52,000, then I only have $22,000 of available room for this calendar year. If I withdraw the $30,000, I still only have $22,000 of contribution left for the current calendar year. I'd be able to put $22,000 back into a TFSA this year but could only contribute the additional $8,000 the following calendar year, when I'll regain the $30,000 of contribution room (What I withdrew the year before) + the new year's contribution room.
So now that you know about the TFSA, let's see if it's right for you and if so, how much you should be contributing to it.