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Looking to grow your savings without paying taxes on investment earnings? There’s no other account quite like the Tax-Free Savings Account (TFSA), a registered plan any Canadian over the age of 18 can open.
The benefits of a TFSA seem simple. However, there are important rules with this account that, if not followed correctly, could limit your growth potential. Here are a few common TFSA mistakes to watch out for!
Imagine you’ve opened your TFSA and deposited cash into it. Good to go, right?
Not exactly. You need to invest those funds to take full advantage of your TFSA!
If you just hold money in your TFSA without investing it, your money will decrease in value each year due to inflation.
More importantly, you’ll be missing out on the main benefit of your TFSA: tax-free growth on investments!
Get the most out of your TFSA by investing your savings. Whether you’d like to open a TFSA GIC or invest through a Cambrian Advisor, we can help you get started. Book a meeting today!
Every year after you turn 18, you gain more TFSA contribution room. This allows you to add more funds each year and continually grow your savings!
It’s important to ensure you’re staying within your contribution limits whenever you put more money into your TFSA, otherwise, the Canada Revenue Agency (CRA) will impose a 1% tax per month on the excess TFSA amount.
Check your annual tax return to find out your available TFSA contribution limit, and make sure not to exceed it! You can also check your CRA account online.
Need to move your TFSA to another financial institution? You can do so without affecting your contribution room, but it’s important to ensure the transfer is filed correctly.
When moving your TFSA, make sure your financial institution files it as a direct transfer, not a withdrawal.
Day trading or active trading within your TFSA is not permitted.
What is day trading? It’s when you frequently buy and sell securities at a high volume within the same day.
TFSAs are not intended to be used for business. If you’re buying and selling assets with short holding periods, the CRA could see the transactions as part of an active trading business.
And if the CRA determines that your transactions are for business, any investment gains will be fully taxable.
It’s better to be safe than sorry. Avoid frequent trading within your TFSA if you plan to open a self-directed account.
You can always contact us to check in on your investment plan and ensure you’re set up for success.
When you withdraw funds from your TFSA, you gain back the contribution room you would have previously used up. Just not in the same calendar year.
Your contribution room is only restored at the beginning of the following year.
That means if you add more funds to your TFSA in the same year, you might accidentally overcontribute.
Try not to withdraw and contribute to your TFSA in the same year, or you could end up overcontributing (and getting penalized on the excess amount).
TFSAs can be surprisingly complex when you look at the finer details.
From understanding your annual contribution limits to the types of investments you can hold in your TFSA, it may feel overwhelming.
That’s why our advisors are here to help. We can answer any questions you might have and put together a personalized investment plan based on your financial goals.
Ready to open your TFSA at Cambrian? Let’s get started! Book a meeting today.
Disclaimer:
Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.
We would be happy to discuss your unique situation with you.
Our goal is to make complex topics like this one, simple.
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