Self-Directed TFSAs Top Tax Tip
I heard about this a while back (it's new), and decided to find out more about it. I know there aren't that many Canadians on this forum, but I'm surprised this has never been brought up.
TFSAs seem like the ultimate savings vehicle (To hold liquid funds).
I'd like to know what people think of this TFSA? Even if you are American, given the choice, would you see yourself investing in a TFSA?
And to Canadians, have you opened your TFSA?
I've compiled a list of the important points regarding the TFSA. If you need more information, you can go to Tax-Free Savings Account (TFSA) for Individuals
Honestly, it almost seems too good to be true. Pretty insane actuallly. In a few months when I turn 18, I will be opening one.
Who is eligible for TFSA
Any individual (other than a trust) who is at least 18 years old, who is a resident of Canada and has a valid Social Insurance Number (SIN) can be a holder of a TFSA.
You cannot contribute to a TFSA until you turn 18. However, when you turn 18, you will be able to contribute up to $5,000 because this amount will not be prorated.
You don't need employment income to accumulate TFSA contribution room!!!
Self-Directed TFSA
A self-directed Tax-Free Savings Account allows you to build and manage your own investment portfolio by buying and selling a variety of different types of investments.
You can contribute certain property to a self-directed TFSA, such as a mortgage, shares, cash, bonds, or a unit of a mutual fund trust. If you are considering this type of TFSA, you may want to consult with your financial institution.
TFSA dollar limit
For 2009, if you are eligible, you can contribute up to $5,000 to your TFSA. After 2009, the annual TFSA dollar limit will be indexed to the inflation rate.
The indexed amount that will be provided will be rounded to the nearest $500 increments. For example, assuming that, in 2009, the inflation rate is 2%, the TFSA dollar limit would remain at $5,000 for 2010 and 2011, but would increase to $5,500 in 2012.
How is a TFSA different from an RRSP?
Some of the differences between a TFSA and an RRSP are:
· Contributions to a TFSA are not tax deductible.
· Withdrawals from a TFSA are not taxable and are added back to next year's contribution room.
· With a TFSA you don't need earned income to accumulate contribution room.
· There is no age limit by which you can no longer contribute to a TFSA.
· You can provide money to your spouse or common-law partner so they can contribute to their TFSA.
You can contribute to a TFSA by transferring money directly from your RRSP. If you contribute to a TFSA using money from your RRSP, we will consider that you have withdrawn the money from your RRSP. By doing this, you will be subject to the applicable tax implications for withdrawing money from an RRSP. For more information consult your TFSA issuer.
TFSA contribution room
The TFSA contribution room is made up of: TFSA contribution room accumulates every year that you are 18 or older and a resident of Canada throughout the year. You do not have to set up a TFSA to earn contribution room.
Based on information provided by the issuers, the Canada Revenue Agency (CRA) will determine the TFSA contribution room for each eligible individual. Your annual contribution room will be indicated on your notice of assessment.
Any dollar limit from the current year that you do not use will be added to your TFSA contribution room for the next year.
Withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year.
You can contribute to a TFSA without filing a tax return. However, the CRA will not provide you with a TFSA room limit as this amount is shown on your notice of assessment when you file a return. You should keep track of your room limit to ensure you do not contribute more than your TFSA room.
Example
(Assuming no indexing) In 2009, Carl is allowed to contribute $5,000. He contributed $2,000 for that year.
2009 TFSA dollar limit: .................$5,000
2009 contributions:.................. − $2,000
unused TFSA contribution room
available for future years ........ .... $3,000
In 2010, Carl does not contribute to his TFSA, but makes a $1,000 eligible withdrawal from his account.
2009 unused TFSA contribution room ......$3,000
2010 TFSA dollar limit........................ + $5,000
2010 unused TFSA contribution room
available for future years.......................$8,000
Carl's unused TFSA contribution room for 2011
2010 unused TFSA contribution room
available from previous year...................$8,000
2010 eligible withdrawal .....................+ $1,000
2011 TFSA dollar limit........................ + $5,000
2011 TFSA contribution room ..............$ 14,000
You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do so, you will be subject to a tax equal to 1% of the highest excess amount in the month, for each month you are in an overcontribution position.
Example
In 2009, Sarah invests $5,000 in a TFSA. Later that year, she withdraws $3,000 for a trip to Europe. Unfortunately, her plans change and she cannot go. Since Sarah has no unused TFSA contribution room left, she will have to wait until the beginning of 2010 to deposit the $3,000 in her TFSA. If she does so earlier, she will have overcontributed to her TFSA and will be charged a monthly tax of 1% on the overcontributed amount.
Making withdrawals
Depending on the type of agreement that you have for your TFSA, you can generally withdraw any amount from the TFSA at any time and for any reason, with no tax consequence!!!
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