TFSAs can maintain a variety of investments—they aren’t only a place to park your money (though you are able to do that, too). Earlier than we get into eligible TFSA investments, let’s evaluate what makes these accounts so helpful.
The TFSA’s superpower: tax-free funding development
Why open a TFSA? Any cash contributed to a TFSA and any earnings earned in a TFSA—together with curiosity, dividends and capital features—are tax-free endlessly! Right here’s an instance: When you make investments $10,000 in an exchange-traded fund (ETF) held inside your TFSA and the worth of your funding grows to $22,000 over the following 10 years (assuming an annual development charge of about 8%), the $12,000 achieve is tax-free.
TFSAs have annual contribution limits, listed to inflation. In 2023, the restrict is $6,500. When the account was launched in 2009, the restrict was $5,000, and since then, it has elevated by $500 each few years, with one exception—in 2015, when the annual restrict was $10,000.
Your TFSA contribution room begins to build up the yr you flip 18, even for those who haven’t opened an account but. Your contribution room is the sum of the next:
- The present yr’s restrict
- Your unused contribution room from earlier years
- Any withdrawals made within the earlier yr
What’s the utmost doable contribution room? When you’ve been an grownup and a resident of Canada since 2009—and have by no means contributed to a TFSA—you’ve got $88,000 of room, as of 2023. (Examine your TFSA contribution room with MoneySense’s calculator.) To open a TFSA, you could have a legitimate SIN, be at the very least 18 years outdated and be a resident of Canada (and be within the nation at the very least 183 days of the tax yr).
Once you withdraw from a TFSA, you keep your contribution room, however any withdrawals can solely be re-contributed to a TFSA within the subsequent yr. Watch out to not over-contribute in any given yr, otherwise you’ll be topic to a tax of 1% on the surplus quantity, for each month it’s nonetheless in your TFSA.
What investments are you able to maintain in a TFSA?
As talked about above, a TFSA can maintain a variety of investments and is a really versatile funding account. Qualifying investments are the identical as these for an RRSP, together with:
- Mutual funds: Mutual funds are pooled investments that maintain a portfolio of securities, comparable to shares, bonds or various belongings. Funding earnings earned from these funds may very well be curiosity, dividends or capital features.
- Trade-traded funds (ETFs): ETFs are additionally pooled investments that maintain a portfolio of securities, comparable to shares, bonds or various belongings. Like mutual funds, they could supply diversification; nonetheless, in contrast to mutual funds, ETFs are purchased and bought on an trade and could also be extra cost-efficient than comparable mutual funds.
- Shares: When you maintain the shares, or shares, of particular person corporations, you possibly can earn dividends or capital features. (You may additionally have capital losses, which in a TFSA can’t be claimed towards capital features, in contrast to in a non-registered funding account.)
- Bonds: When you purchase a authorities or company bond, you’ll obtain a set rate of interest for a predetermined interval, and your capital can be returned when the bond matures. Bond traders could earn curiosity, capital features or each.
- Assured funding certificates (GICs): A GIC is an funding that ensures a set charge of return over a time period.
- Money or money equivalents: This consists of financial savings accounts and cash market funds.
Why take into account ETFs in your TFSA?
ETFs have develop into very talked-about with Canadian traders, particularly younger and new traders, as a result of they provide the next: