2024 TFSA (Tax Free Savings Account) Best-explained

What is a TFSA?

Tax Free Savings Account is a form of investment account that 'waives' taxes on investment returns within this account.

TFSA is the most basic form of financial benefit provided by Canadian government to foster savings for Canadian residents.

 

Types of accounts

There are many types of accounts in Canada: 1. chequing account 2. savings account 3. tax free savings account 4. registered retirement savings plan 5. registered education savings plan 6. non-registered investment account 7. registered disability savings plan 8. locked in retirement account

Chequing account can only hold cash whereas TFSA can hold various types of assets: cash, mutual fund, stock, ETF, and others.

 

Understanding Canada's tax filing system

There are other types of benefits/accounts, and in order to understand how they work, we must understand Canada's tax filing system. (Quite easy to understand)

In Canada, if you make any form of income, you are expected to file it to Canada Revenue Agency(CRA), then pay taxes on the filed income. and the tax you pay is called an income tax.

 

TFSA Example

John is employed at a restaurant and got paid $40,000 salary last year. 

John has $50,000 investment in TFSA which made $5,000 interest income last year and $60,000 in a regular investment account(officially called Non-registered account)  which made $6,000 in interest income last year.

Therefore, John is required to file and pay income taxes on the following amount:

  $40,000 salary income

+$6,000 interest income

=$46,000 taxable income. 

If John's tax rate is 20%, he will owe to CRA $46,000 * 20% = $9,200. Since returns made from TFSA is *tax free* John saves 20% of $5,000 = $1,000 in taxes. 

 

Frequently Asked Questions

1. Does TFSA limit grow as my Investment grow? 

Yes. If you initially put $50,000 and if it had $60,000 investment returns, your TFSA can hold $110,000 and you do not need to withdraw the excess amount of your limit.

2. What investments can I hold inside TFSA?

You can hold stocks, mutual funds, GICs, ETFs, and other investment types approved by CRA.

3. What is my TFSA contribution limit? 

Your limit accumulates from the year you turn 18. TFSA was first introduced in 2009, so if you were 18 years old in 2009, your total limit as of 2023 is $88,000.

If you were either not a Canadian resident or were only 15 years old in 2009, and you became Canadian resident or turned 18 in 2012, your limit will be $88,000 - $15,000 = $73,000.

2024 limit will be $7,000 making the life time contribution limit = $95,000 (If you were 18 and older in 2009)

For full details of TFSA, you may visit the link below:

Official CRA website

 

Other types of accounts

RRSP

RESP

FHSA

RDSP

 

Which platform should I use to open TFSA?

I have used multiple trading platforms, and I find Questrade has the cheapest trading cost that can save you $$.