Tax Free Savings Account

TFSA Advantage (For Canadian Residents)

A Tax-Free Savings Account (TFSA) is a registered investment account where you can save, invest and grow your savings tax-free. This is a registered investment vehicle that started in 2009. When you turn 18, you can contribute a specific amount on that year. When you max out your contribution room, you can add more on the following year.

If you have not opened a TFSA account yet, you can contribute an amount from the year your turned 18, until the current year. If you are already 18 or older in 2009, you can put as much contribution amounting from 2009 to the current year. Each year have a different contribution room. The TFSA was created in 2009 so there is no contribution room from 2008 and before then.

Here is the list of contribution rooms from 2009-2020.

2009: $5,000

2010: $5,000

2011: $5,000

2012: $5,000

2013: $5,000

2014: $5,500

2015: $10,000

2016: $5,500

2017: $5,500

2018: $5,500

2019: $6,000

2020: $6,000

If you are already 18 in 2009, your contribution room is the total amount from 2009 until the current year.

TFSA Portfolio Income

Once you set up your investments, your growth and earnings are tax free. You can withdraw from your account and it will be tax-free. The amount you withdraw in the current year can be reinvested back within the following year. If you took out a total amount of $5000 this year, your contribution room for the following year will have an extra $5000.

Day trading can be considered a business depending of the level of trades. This may cause the CRA to tax you. It is best to keep swing and day trading at minimum level if possible.

The benefits of a TFSA are the exposure to many kinds of investments that can be beneficial for individuals who have short- and long-term goals. You can invest in stocks, mutual funds, GICs, Bonds, and ETFs. Interests, Dividends and capital gains are not taxed if you invest in Canadian companies.

Investing in US companies will have a 15% withholding tax. It is best to keep US investments in your RRSP for tax shelter.

Over-contribution Penalty

If you are over-contributing, you will have a TFSA excess contribution amount in your account. The excess contribution amount is penalized 1% per month.

Let’s say that your current contribution limit is $20,000 this year. When you deposit a total amount of $23,000, your excess of $3000 will be taxed at 1% rate per month.

For more info about your TFSA and contribution, call Tax Information Phone Service at 1-800-267-6999.

Fluctuations and Volatility

Most investments have a volatility just like the fluctuation of the market and economy. This year, your capital could be worth 5% more and be under 6% within the next year. The long-term benefits of having investments outweighs the short-term fluctuation of your capital.

By investing with a very good company, you would often see growth year over year. There may be volatility, but the growth is more important.

If you invested $10,000 today, in 10 years, your investment could be worth $12,000-15,000 or more plus the %4 yearly earnings of your investment. Every investment has a different yield and return. You have the freedom to choose where to invest your money.

You can also invest in growth companies. Growth companies tend to give 1-2% dividends or sometimes much less. The small amount of dividend is subsidized by the year over year growth. This means your investment may grow 5-10% every year. The growth also does vary each year and can be slowed by weaker economy. Growth companies are great investments because they focus on reinvesting on their business to boost profits. They may also use extra capitals to acquire other businesses to save cash or increase profits. All the work is done for the benefits of the investors.

Benefits of Compounding

By investing your profits back, your savings also grow at a much faster rate. If you can put away $5000 a year with 4% return, the next year you will have $5,200. Repeat and you will have $10,608. On your third year of reinvesting, you will have $16,232. That is a profit of $1,232 in 3 years.

This is just an example for a perfect world scenario. Price do fluctuate time to time and year to year.

Can you lose Money?

All kinds of investments have risks. There are low, medium, and high risks. There is no such thing as zero risk. Even your bank has the risk of going bankrupt.

When you invest your money without educating your self first, this can lead to bad investments. Before opening a TFSA or start investing, spend some time with a financial advisor first before getting ahead.

People earn extra income with their TFSAs, but this is by investing with proper education and risk management. You may also have your broker, or your financial institution manage your portfolio on low risk investments.

Poor investments have caused many people to lose more than they can afford. There are some who have lost their savings due to poor judgement and bad investments.

Many experts can’t beat the market so most average people like us will likely lose against the market. This means buying on cheap stocks assuming they will go up. Sometimes, when you buy at the bottom, you end up going down even lower.

You need to stay away from noises. Everyone will tell you what to buy but, in the end, you need to depend on your own research.

High Risk Investments

I would recommend staying away from risky investments and know how to classify them. Penny stocks are examples of high-risk investments. You can make money from penny stocks, but it requires a very complex and high amount of knowledge to trade and profit from them. The ins and out of penny stocks are very complicated. You could have a 50% growth tomorrow then lose it all the next day.

There can also be risky high dividend stocks that can come crashing down in just few months or years.

Conclusion

The extra earnings from a TFSA can be very helpful not only for one’s short- and long-term goals but also a very great asset for retirement. Depending on your risk tolerance, your investment can grow higher than 5% a year. Some years may be slower but what matters more is that it grows.

The market does go down from time to time, but it always bounces back up higher. We have just experienced 2 recent recoveries from the dot-com bubble, and the 2008 financial crisis. There will always be hard times just as we have the good times. When a problem arises, we tend to solve it. We are privileged to have a rich country that can fix many difficult financial problems.