All About TFSAs – Tax Free Savings Accounts

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Welcome to the wealth and wellness podcast with

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me Kaylie Bob air, I specialize in helping people to achieve

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their financial goals. I have a love for all things numbers, and

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I'm passionate about financial literacy. My goal is to spark

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healthy and positive conversations around wealth and

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investment, and create a world where nobody is limited by their

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financial situation. But wealth is just one piece of the

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equation of living our best lives. So join me as we explore

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both wealth and wellness topics. From your net worth to your self

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worth, get ready to take confident action. Hello, this is

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Kaylee. And thank you for listening to this episode of the

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wealth and wellness Podcast. Today I wanted to talk all about

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TFSA accounts Tax Free Savings accounts. So this is a very, I

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guess, Canadian focus topic of conversation today. So a Tax

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Free Savings Account wanted to talk about them because they are

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a popular topic of conversation when it comes to investing, and

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especially to start the new year because you do get added

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contribution room if you're eligible to have a TFSA account.

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And we'll talk a little bit about that in one moment. But

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again, a reason to chat about them right now, because they

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might be on your mind Tax Free Savings accounts. So what is a

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Tax Free Savings Account, it is a registered plan that allows

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people who are 18 or older and have a valid Social Insurance

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Number, so you have to have a valid cin number and reside in

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Canada. So it allows these individuals to save up to a

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certain amount of money each year without paying taxes on the

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earnings, a TFSA TFSA accounts were introduced in 2009. And

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they started by allowing individuals to put in up to

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$5,000 in these accounts, and then they proceeded to add

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additional contribution each year since so what does that

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look like as of today in 2022, you would have $81,500 in

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contribution room, if you were the age 18 or older, since the

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start date, which was 2009. So as of today, 2022, you have

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$81,500 in contribution room. And what that looks like as far

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as like historically, limit contribution limits. Again, they

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started in 2009. So from 2009 to 2012, they added $5,000 per

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year, in 2013. They increased it slightly so 2013 2014 5500. In

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2015, they upped it to $10,000. And then 2016, they brought it

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back down 5500 5500 5500 2019. They increased it slightly to

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$6,000. And again, sort from 2019 to 2022. It's been $6,000

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per year. And that's what brings us to the grand total of $81,500

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in contribution room as of 2022.

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So, as far as TFSA accounts, they do serve to shelter any

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earnings from taxes. So think of a tea. FSA, think of the TFSA is

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just the shell, it's the account, it's just a type of

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account. It's nothing in itself a Tax Free Savings Account. It's

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nothing, it's just a type of account. Also, I find the name

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is a bit of a misnomer, and it causes some confusion. So it's

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called a Tax Free Savings Account, which leads people to

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believe it's only meant to function like a savings account

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and hold cash. But that is not at all the case. And it would be

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probably better off to call it a tax free investment account.

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Because within a Tax Free Savings Account, you can hold

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all different types of investments, anything from GIC,

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stocks, bonds, mutual funds, ETFs. Again, there, the list is

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very long, and there's an array of options. Generally the only

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limitation on that being where you're invested with the firm

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you're with. So at a bank level, you might have fewer options, it

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might only be granted as somewhere where you can put cash

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in but if you do more of like a direct investing, or if you're

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working with a wealth management firm, or something beyond that,

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maybe a robo advisor type setup or something like that,

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generally you're going to have access to more options. So a big

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difference between people often think of TFSA versus RRSPs,

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because those are the two. Those are two big types of registered

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accounts here in Canada. So, a big difference of what

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differentiates a Tax Free Savings Account from a

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Registered Retirement Savings Plan is that your contributions

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to the TFSA account are not tax deductible. So you're not going

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to get any sort of refund for contributing to the account a

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TFSA account as you would with an RSP account. So, again, the

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money you're putting in is after tax, you will not receive any

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sort of, you know, credit or refund for putting in that

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amount to a TFSA. But again, the benefit is really all about that

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tax sheltered growth, you put the money in, and once it's in

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the TFSA, you can do all sorts of investing. And everything

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within that account is tax sheltered, so any growth, any

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investment income, capital gains, dividend payments, all

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sheltered. So let's say you put $5,000 into the account, and

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your investment doubled in price over the coming year. And let's

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say now, it's $10,000, your 5000 became $10,000, the stock you

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bought was a great one, and you've made lots of money, and

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you so you decide to maybe sell the investment. Well, what

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happens nothing, because it's in a Tax Free Savings Account. So

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there's no tax implications, there's no reporting that you

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need to do, it's all just fine, you bought the the investment

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you did well on it, you sold it great. Your Tax Free Savings

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Account has, you know, gone up in value, you've made some money

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in there. But again, nothing to report, nothing you have to

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advise CRA of. It's all tax sheltered. Let's say for

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instance, you buy a stock that pays dividends, and the

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dividends are paid on a quarterly basis and the stock

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you hold in your TFSA account, those dividends is paying will

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simply just be added to the account. And at year end,

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there's no tax reporting, you don't have to disclose the

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dividends you received. Because again, the account is completely

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tax sheltered, and your investment holding is within

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that tax sheltering account. So nothing needs to be disclosed to

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CRA, there is no tax implication. So overall, these

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accounts are an amazing tool to use for investing. And they,

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they save you from a lot of taxes, obviously, by allowing

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that money to grow tax free that tax sheltering is a huge benefit

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when it comes to investing. Because when we invest, the goal

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is to make money in some form, whether it's interesting,

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through dividends, capital gains.

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Again, we like to see increasing values, adding our accounts

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growing. And the great thing with a Tax Free Savings Account

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is that can all be happening and done and there's not going to be

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a tax implication, there are very flexible in that you can

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withdraw from the account at any time. And when you take the

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money out, there's no tax implications, either I should

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turn my phone down. So think of it again, you bought that stock

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for 5000, it went up to $10,000 in value your holding, you sold

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the investment, maybe you said oh, I'm gonna you know, I've

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been saving up for this big vacation or this is gonna go

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towards a down payment on a house or whatever the reason is,

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you take out let's say you take out that $10,000. And again,

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you're nervous. Oh, you know, part of that was growth, it

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wasn't all money I put in, I only put $5,000 in the other

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$5,000 I made. Again, you still can take it out no tax

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implication. So again, yay, tax free wins, wins again. And when

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you're withdrawing that money, so it's not impacting your

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income at all, because you're taking the money out, no tax to

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report. It's not increasing your yearly income. So for people

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that are receiving gov, like benefits, such as like Old Age

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Security or anything like that, your Tax Free Savings amounts,

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if you're taking out money from there, it's not going to impact

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those those amounts. So it's not that you're going to get into

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clawback territory with OAS, or anything like that it won't

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impact your income when you take money out of a TFSA account. So

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you can take it out and use it for a variety of purposes. Maybe

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you have a targeted goal, like you're saving up for a down

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payment on a home. And that's what you're using your Tax Free

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Savings Account. Maybe it's for a bigger purpose or goal such as

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towards your financial freedom or your retirement number. And

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this type of account can really complement. If you have let's

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say you have a pension and you or your your company's doing RSP

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matching, you're doing it through there you have RSP have

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a RIF account. TFSA 's are a great tool to have as a

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compliment for retirement income as well. It's just going to

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serve as another bucket essentially to be pulling from

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and one that doesn't impact your yearly income so it's not going

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to push you into a higher tax bracket. A few things to keep in

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mind with a Tax Free Savings Account. Your contribution room

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does carry forward. So if you don't have one yet, or you

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haven't started one, the year you know you didn't Start one in

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2009, when they originated, that's completely okay. You can

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do so any time. And you'll still have the same accumulated room.

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Again, caveat being that you were over 18 and resided in

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Canada. So you accumulate room for years that you are residing

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in Canada, if you live outside of Canada, for a year or

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something like that, you will not receive contribution room

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for that year. So do keep that in mind. And again, it's based

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on being over 18 years of age.

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So if you do don't have a TFSA, or have never opened one,

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completely, okay, there's no time like the present to get one

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started. And this is a great conversation to for parents,

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it's a great idea. I'm all about, you know, starting kids

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early starting your children investing, what a great idea for

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when your child turns 18 years old, maybe, you know, encourage

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them to start a Tax Free Savings Account, they get that room the

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year they turn 18. So if they turn it in, you know, February

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of this year, that's when they will start accumulating the

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room, like they get the $6,000 room for 2022, you can open the

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account for them. And they can get started investing and maybe

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that's a you know, it's a great idea as a birthday present to

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maybe you give them some money for a contribution to their TFSA

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account. And then they can get started with some investing. So

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a great tool to to get young people started I love when I'm

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working with people and clients and they start talking about

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children like what are now becoming, I guess, adults, and

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getting them started when they're 18 years. So it's a

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really good conversation to have with your kids really great idea

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to get your kids started with a Tax Free Savings Account. Also,

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keep in mind that TFSA contribution room can be

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different for everyone. So it's not as simple as saying it's

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$81,500 room if you've been residing in Canada since 2009,

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and have been over 18. Since then, there are some different

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nuances to that. And the reason being is that if you make

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withdrawals from your TFSA, at any point in time, you actually

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get that room back as well the following year. So let's say go

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back in time a little bit, let's say it's December of 2021. And

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you took out $5,000 from your TFSA account for whatever

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reason. Up until that time, let's say two that you were

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fully maxed on your contributions, so you're fully

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Max, and then you take out $5,000 room that are $5,000 cash

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that year. Well, as soon as you hit January 1 2022. So as soon

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as the New Year hits, you receive the additional $6,000

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room that everyone received, that was added to everyone's

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contribution room. But you will also have that $5,000 room added

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back from the withdrawal you made in 2021. So in that case,

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your TFSA room has actually become at $6,500. Because you

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had taken that $5,000 out. And that was done last year. And now

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it is added back this year. Again, if you took out $10,000

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Last year, you would have $10,000 additional room to add

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this year. So it's again, it's based on whatever you withdrew,

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you get that room back the following year. So people can

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actually now have all sorts of numbers there because maybe

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they've made withdrawals in a few years or maybe, you know,

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they made one big withdrawal in one year. And now they receive

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that room back the following year. So that can get a little

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tricky and, and your room can get a little bit more

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challenging to track as a result. But you know, make sure

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that you are being diligent about tracking, okay, so again,

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knowing that you get that extra room it can or not, not extra,

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you get basically the room from what you took out, you get it

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back the following year. So do do keep that in mind. You don't

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just have to say okay, the room is at 1500 That's what mine

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would be because yours might be different. The best place to

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double check your Tax Free Savings Account room is your CRA

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my account. However, please keep in mind that the number on there

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is likely. It's generally always updated annually and they're

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usually couple months slow. So let's say it's already end of

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January. Let's say you were to check your your contribution

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room for your TFSA on your My account. The number it shows

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there might not be recording what you contributed in 2021

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Yet, it might still have not updated yet. So what that would

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be telling you is it's still showing what you had in 2021

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Plus it added the room for 2022 it added $6,000

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You want to make sure you minus anything you contributed in

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2021, if it has yet to be updated, or you can also just

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check back within the coming weeks here, just to make sure

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you have that up to date number, you do want to avoid over

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contributing to the Tax Free Savings Account, as CRA will

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charge a penalty of 1% interest per month on the amounts that

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exceed your room until you withdraw it. So they'll keep

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charging at 1% per month, any if you've gone over, and they don't

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necessarily alert you right away. So it's not one of those

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things that if you've gone over, and you're you know, a couple

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days in or a month in series gonna reach out and say, Oh, see

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you over contributed, make sure you take it out. No,

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unfortunately, generally, it takes them a while. And I mean,

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by all means there's a lot of people with these accounts and a

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lot of sort of differences to the room and numbers as we sort

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of we discovered with the idea of taking money out and things

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like that. So let's not completely blame CRA and, and

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think that they're evil for trying to charge us with large

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penalties, there is a big amount of record keeping that goes on

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with these two. So do keep in mind that the onus is really on

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you and work with your financial professional, if you work with

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one really to track this and make sure it's the don't really,

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you know, accept excuses like Woopsie, or I didn't realize or

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something like that they're pretty to the point care,

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unfortunately. Um, so again, be very mindful. Another thing to

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keep in mind is you can have multiple TFSA accounts. And you

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can have multiple accounts with one institution, you can have it

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across a few companies or different firms. But again,

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always being mindful of your room two accounts or three

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accounts does not mean you get double or triple the

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contribution room, you still have the same room. So be

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mindful, if you have multiple accounts, you can move your TFSA

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account between institutions as well. But it says important that

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is processed as a transfer. So you want to make sure that the

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TFSA goes to another TFSA. And it goes over as a transfer not

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that you take it out of the TFSA and then put it back into a

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different one at a different firm, because obviously that's

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going to impact your room. A few more considerations. TFSA

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accounts have to be an individual name, they cannot be

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joint accounts. So if you're married, you would have one in

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your name one in the name of your spouse, you cannot just

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have a joint account. You can however gift money to spouses or

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a spouse. Sounds like you have multiple spouses when I said

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that a spouse a child children, you can gift money, and they can

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contribute to their TFSA accounts. Because this is after

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tax money, right? The money has already been taxed by CRA by you

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gifting it to these people to put in their tax free savings

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accounts. There's nothing sort of that you're going, you know

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beyond or trying to be tricky or sneaky or anything like that

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with taxes, it's after tax money, you've already paid the

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tax. And so if you're gifting it to a spouse to help max out

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their TFSA, or again, a child, it's a great idea for your

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children to get them started. That's completely okay. Usually

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there might be one extra step like a letter, you have to sign

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acknowledging that you're putting it into their account

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just because it's going to different names or something

Kalee Boisvert: 00:18:17

like that, but nothing beyond that it's still allowed. In

Kalee Boisvert: 00:18:21

provinces in most provinces, you have the ability to self select

Kalee Boisvert: 00:18:24

a beneficiary or beneficiaries for the account. So make sure

Kalee Boisvert: 00:18:28

you do do that. So if something were to happen to you, you can

Kalee Boisvert: 00:18:31

select a beneficiary or beneficiaries. And that's

Kalee Boisvert: 00:18:35

obviously who this the proceeds would be distributed to.

Kalee Boisvert: 00:18:39

Again, if it's a spouse, it's very tax efficient, it just

Kalee Boisvert: 00:18:43

rolls over to them no tax implications, and it doesn't

Kalee Boisvert: 00:18:47

impact their room. So if they're already maxed out on room, but

Kalee Boisvert: 00:18:50

they're your spouse passed away, your their TFSA can still roll

Kalee Boisvert: 00:18:53

into yours, it doesn't impact room. It doesn't mean you over

Kalee Boisvert: 00:18:57

contributed or anything like that, because between spouses

Kalee Boisvert: 00:19:00

that is allowed. You can make a cash deposit to TFSA accounts,

Kalee Boisvert: 00:19:05

or you can actually move holdings in kind. So let's say

Kalee Boisvert: 00:19:08

you started an investment account, and just completely

Kalee Boisvert: 00:19:12

didn't even think about opening a TFSA. And now you're going oh

Kalee Boisvert: 00:19:15

man, I wish I would have you know, put these shares of Apple

Kalee Boisvert: 00:19:18

or whatever it is I'm just naming a random stock in a Tax

Kalee Boisvert: 00:19:22

Free Savings Account. So you can open a Tax Free Savings Account

Kalee Boisvert: 00:19:26

move the shares in kind, what you need to be mindful of is

Kalee Boisvert: 00:19:30

that if there is already a gain, it's just it's counted as a

Kalee Boisvert: 00:19:35

deemed disposition the day you move it over. So let's say you

Kalee Boisvert: 00:19:38

bought a stock and it was trading at $5. And then you made

Kalee Boisvert: 00:19:42

the decision to move it over to the TFSA. When it's now trading

Kalee Boisvert: 00:19:45

at $6 A share you will have to account for that gain that it's

Kalee Boisvert: 00:19:49

had in the in the meantime, basically from when you bought

Kalee Boisvert: 00:19:52

it to when you're moving it over. Any future gains will go

Kalee Boisvert: 00:19:56

on to be tax sheltered. So that is beneficial still but you will

Kalee Boisvert: 00:19:59

have have to be mindful of and report that gain from when it

Kalee Boisvert: 00:20:05

moved over. And then keep in mind, it doesn't work both ways,

Kalee Boisvert: 00:20:10

though. So CRA will require you report the gain, if there was

Kalee Boisvert: 00:20:15

one when it was moved over to the dfsa. But if there was a

Kalee Boisvert: 00:20:19

loss, and then you move it to the TFSA, you cannot keep that

Kalee Boisvert: 00:20:23

capital loss for tax purposes. It's sort of just a wash. And

Kalee Boisvert: 00:20:28

unfortunately, it's just you're putting something in at a lower

Kalee Boisvert: 00:20:31

value, but again, on later, any further growth or dividends or

Kalee Boisvert: 00:20:37

income, or anything like that will be sheltered from that

Kalee Boisvert: 00:20:39

point on. But again, you don't get a benefit of the the loss

Kalee Boisvert: 00:20:44

for moving over at a loss. So that's unfortunate.

Kalee Boisvert: 00:20:49

RSP versus TFSA. So a big question is, people come to me

Kalee Boisvert: 00:20:53

asking, you know, which one should I be putting money in?

Kalee Boisvert: 00:20:55

Great question. And both really have pros and cons. And there's

Kalee Boisvert: 00:20:59

a lot of different factors that come into play. And they will

Kalee Boisvert: 00:21:02

depend on your circumstances and the flexibility and things like

Kalee Boisvert: 00:21:05

that. But if we're just bringing it back to like, if we're

Kalee Boisvert: 00:21:08

bringing it down to very simplicity terms, and saying, if

Kalee Boisvert: 00:21:11

you're thinking of using the account for a retirement savings

Kalee Boisvert: 00:21:14

goal, and wondering which would be the most tax efficient, then

Kalee Boisvert: 00:21:18

there is a general rule of thumb on which to use first, and it's

Kalee Boisvert: 00:21:21

works as this. So if you think you'll be in a lower tax bracket

Kalee Boisvert: 00:21:25

in retirement than you are in right now, you would be better

Kalee Boisvert: 00:21:29

off to first invest in your RSP account before a TFSA. If you

Kalee Boisvert: 00:21:34

think you would be in the same tax bracket in retirement than

Kalee Boisvert: 00:21:38

you are now, then it's either or really, no one really makes a

Kalee Boisvert: 00:21:44

drastic difference tax wise. So you could do TFSA or RSP. If you

Kalee Boisvert: 00:21:48

think you will be in a higher tax bracket in retirement than

Kalee Boisvert: 00:21:52

you are currently in right now in your working years, then you

Kalee Boisvert: 00:21:56

are better off to be investing first in your TFSA account. And

Kalee Boisvert: 00:22:01

a little bit to kind of understand what the why this

Kalee Boisvert: 00:22:05

rule of thumb, I'm saying exists is think about it this way. So

Kalee Boisvert: 00:22:10

in the scenario of being in a lower tax bracket in retirement

Kalee Boisvert: 00:22:14

than you are now. So let's say right now you're in a 35% tax

Kalee Boisvert: 00:22:19

bracket. And then let's say in retirement, you're in a 25% tax

Kalee Boisvert: 00:22:24

bracket. Well, if you make an RSP contribution, while you're

Kalee Boisvert: 00:22:28

in this 35% tax bracket, anything you contribute, you

Kalee Boisvert: 00:22:32

will generally get back about that 35% tax that you paid on

Kalee Boisvert: 00:22:36

that money. So you put it into an RSP, you get a nice little

Kalee Boisvert: 00:22:39

tax break, you will subsequently pay the tax later on. But if

Kalee Boisvert: 00:22:44

you're in a lower tax bracket, let's say that 25% tax bracket,

Kalee Boisvert: 00:22:48

then you're only paying 25%. Whereas originally, you would

Kalee Boisvert: 00:22:52

have paid 35%. So you've saved yourself 10% tax by doing that.

Kalee Boisvert: 00:22:57

So that's still the reason why RSP accounts are also a great

Kalee Boisvert: 00:23:01

tool and do make sense for those retirement savings. So RSP and

Kalee Boisvert: 00:23:05

TFSA, though that's the general rule of thumb, what I've just

Kalee Boisvert: 00:23:09

described, again, it's going to be a bit different for everyone.

Kalee Boisvert: 00:23:13

And there might be you know, still question mark being well,

Kalee Boisvert: 00:23:16

I don't know if I'm going to be in a higher tax bracket than

Kalee Boisvert: 00:23:19

then am I and now or what if they change the tax brackets,

Kalee Boisvert: 00:23:22

and they go a lot higher than than they are right now. So yes,

Kalee Boisvert: 00:23:26

there's still unknown factors. It's not as black and white as

Kalee Boisvert: 00:23:30

and easy and straightforward, probably as we would like. But

Kalee Boisvert: 00:23:34

that's again, the general rule of thumb. So I don't like I

Kalee Boisvert: 00:23:37

don't necessarily want you to completely, you know, write off

Kalee Boisvert: 00:23:40

one or the other. Again, both have their pros and cons, and a

Kalee Boisvert: 00:23:44

place and they're going to be a little bit different for

Kalee Boisvert: 00:23:46

everyone. So it's good to kind of go through that scenario for

Kalee Boisvert: 00:23:48

yourself. Hopefully, you found this helpful and talking all

Kalee Boisvert: 00:23:53

about TFS. As it got you you know getting inspired to do some

Kalee Boisvert: 00:23:56

investing or open your TFSA account if you don't already

Kalee Boisvert: 00:24:00

have one. And remember a Tax Free Savings Account. It's just

Kalee Boisvert: 00:24:03

type of account, there's lots of possibilities on what you choose

Kalee Boisvert: 00:24:07

to do within your account. Make sure you do consider your goals,

Kalee Boisvert: 00:24:10

your timeframes, your tolerance for risk, when done designing

Kalee Boisvert: 00:24:13

that investment plan. And of course, if you don't want to do

Kalee Boisvert: 00:24:16

it alone, you don't have to, you can seek the support from a

Kalee Boisvert: 00:24:20

financial professional or anything like that. But again,

Kalee Boisvert: 00:24:24

the key here, which I always want to say is the key. And the

Kalee Boisvert: 00:24:27

important part is it's all about taking action. So if you don't

Kalee Boisvert: 00:24:31

have a Tax Free Savings Account in place, maybe this is your

Kalee Boisvert: 00:24:34

goal for January 2022. You're going to get one of those

Kalee Boisvert: 00:24:37

started, you're going to get it open, you're going to start

Kalee Boisvert: 00:24:39

putting some money in every month, you're going to set up an

Kalee Boisvert: 00:24:41

automatic contribution into it. Get going on some investing in

Kalee Boisvert: 00:24:46

it, maybe you have adult young adult children, and you know you

Kalee Boisvert: 00:24:50

the goal is I'm going to get going to get on them about

Kalee Boisvert: 00:24:53

getting one of these open and I'm gonna say that their reward

Kalee Boisvert: 00:24:56

is you know, a $500 deposit from me or something like that. into

Kalee Boisvert: 00:25:00

their account not from me like it's from you as their parent.

Kalee Boisvert: 00:25:03

Unfortunately, I'm not giving your money to everyone and their

Kalee Boisvert: 00:25:07

children but I do highly encourage you to think of that

Kalee Boisvert: 00:25:10

too if you have children and this is a great way to get them

Kalee Boisvert: 00:25:13

started young adult children. So I hope you enjoyed the episode.

Kalee Boisvert: 00:25:17

Thank you so much for tuning in, and I will catch you on next

Kalee Boisvert: 00:25:21

week's episode. Thank you bye

Kalee Boisvert: 00:25:28

I hope you found value in this episode. And because I'm such a

Kalee Boisvert: 00:25:32

proponent of taking confident action, I want to pose a

Kalee Boisvert: 00:25:35

question to you the listener. What is one action that you feel

Kalee Boisvert: 00:25:40

inspired to take after listening to today's episode? If you enjoy

Kalee Boisvert: 00:25:45

listening, please subscribe and share with your friends and

Kalee Boisvert: 00:25:47

family. Thank you so much and I will catch you next time