Have you ever discovered that you over-contributed to either your RRSP or TFSA? Then check out the commonly asked questions below to find out what you can do about it. Also check out the information below to help you determine if a TFSA is right for you.
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TFSA
If you currently have a Tax Free Savings Account (TFSA) at a financial institution but you would prefer to have it somewhere else, the good news is that you are able to transfer it; The bad news is that most (if not all) financial institutions will charge you a transfer out fee ranging from $50 to $100.
There are ways that you can avoid this transfer out fee. Check out the tips below to see if one of these will work for you.
Many Canadians have recently received unwelcome letters from the Canada Revenue Agency (CRA) regarding excess contributions to their Tax Free Savings Accounts (TFSAs). Penalties in the form of fees owing to the government were assessed for excess contributions made during 2009.
Most people affected were likely confused by the restrictions placed on the TFSA by the government. The important thing for Canadians to understand is that once you have used your contribution space for the year, even if you withdraw from your TFSA, you cannot put that money back until the following year.
With the introduction of the Tax Free Savings Account (TFSA) in January 2009, Canadians now have another investment vehicle option to save for retirement. Whereas before, most people took advantage of the immediate tax deduction for contributing into a Registered Retirement Savings Plan (RRSP), now they have to consider what will be most beneficial to them in the long run. With the RRSP contribution deadline for 2009 fast approaching, it’s important for Canadians to make this decision ASAP.
What are the advantages of contributing to a TFSA?
Although you don’t receive an income tax deduction for contributing into a TFSA, there are some important advantages to consider. All earnings within a TFSA are not taxable, whereas with an RRSP, earnings are tax deferred, but when funds are withdrawn, they are fully taxable.
A second advantage is that there are no expensive tax implications when you withdraw from a TFSA. Since you’ve already paid tax on the money you contribute to a TFSA, when you withdraw the funds it is not a taxable event. By contrast, if you withdraw from an RRSP, not only are you subject to an immediate withholding tax, you also have to add the amount withdrawn to your income for the year and you may end up paying more tax when it is time to fill out your tax forms or prepare your online taxes this year.
At the beginning of this year, the Canadian government introduced the Tax Free Savings Account (TFSA). While it definitely has its perks, there are some disadvantages to the TFSA as well.
Here are the basics about TFSAs:
*Canadians 18 years of age and older can invest up to $5000.00 every year in a TFSA
*The money can be withdrawn at any time.
*You can contribute to your spouse’s TFSA
*There is not a lifetime contribution limit
*Assets from a spouse’s TFSA will transfer upon death to the other spouse without tax implications
*Any funds withdrawn can be put back into the account at a later time without reducing your contribution room
*You don’t have to pay taxes on the investment gains regardless of whether they are capital gains, dividends, or interest income.
*Money contributed to the TFSA are not tax deductible
*If you don’t invest the full $5000.00 for any one year, it can be carried forward to a future year
The Good, the Bad, and the Ugly
TFSAs are generally a great concept because they encourage people to save. The fact that you’re not being taxed on the earnings is also very appealing. However, there are some other aspects to TFSAs that you need to consider. You don’t want to be paying hefty fees for your TFSA, so you need to be mindful of what your financial institution charges. Feel free to shop around before opening your TFSA.
Another thing to consider is that if your investment in a TFSA experiences a capital loss, there is no tax cushion to buffer the loss.
Lastly, when you contribute to a TFSA you are likely to be at a fairly high tax bracket and most people want to decrease their tax bracket by contributing to something such as an RRSP. Unfortunately, TFSAs don’t give you that benefit. In essence, you will be paying more tax if you contribute to a TFSA as opposed to an RRSP.
Each investment option has its pros and cons. TFSAs can be a great method of investing, but like any other option, it’s not perfect. Check out your local financial institution’s website to see what they have to offer and start saving for your current and future goals.