The Tax-Free Savings Account (TFSA) was introduced in Canada in 2009 as a new savings and investment vehicle for Canadian residents. It provides tax advantages by allowing tax-free growth of income, dividends, and capital gains in most cases. TFSAs offer flexibility, allowing tax-free withdrawals for any purpose. Each year, individuals are given contribution room, which accumulates for future use. TFSAs provide a variety of investment options to suit individual preferences and goals. They can complement retirement savings, facilitate income splitting, and contribute to estate planning. Overall, TFSAs are a tax-free and flexible savings and investment vehicle for individuals to achieve their financial objectives.
The primary advantage of a TFSA is that any income, dividends, or capital gains earned within the account are not subject to tax in most cases. This means that individuals can grow their investments without incurring tax liabilities on the gains.
TFSA offer flexibility in terms of how individuals can use the funds. They can withdraw money from the account at any time, for any purpose, without incurring taxes or penalties. This makes it suitable for short-term and long-term savings goals.
Income earned in a TFSA or withdrawals will not affect eligibility for Old Age Security, the Guaranteed Income Supplement, or the Canada Child Benefit. This makes the plan especially attractive for individuals whose taxable investment income would reduce benefits from these programs.
TFSA allow individuals to invest in various asset classes, including cash, savings accounts, bonds, segregated funds, GICs, and more. This enables investors to tailor their TFSA to their risk tolerance and financial objectives.
TFSA can be used as a complementary savings vehicle to Registered Retirement Savings Plans (RRSP) or pension plans. Unlike RRSP, contributions to TFSA are not tax-deductible, but withdrawals are tax-free, making them a valuable addition to retirement planning.
TFSAs can be advantageous for income splitting purposes, as individuals can gift money to their spouse or common-law partner, who can then contribute to their own TFSA. TFSAs can also be used for estate planning, as they can be passed on to beneficiaries tax-free upon the account holder's death.