OTTAWA - The federal government is raising the annual contribution limit for Tax-Free Savings Accounts for $10,000, but the rules surrounding the popular saving vehicles can be confusing. Here are five things to know about the accounts:
Who can contribute: Canadian residents who are at least 18 years old can contribute to a TFSA.
How much money can I put into my TFSA account: Ottawa is increasing the annual contribution limit to $10,000, from $5,500. However, your total contribution limit is cumulative. Unused room carries forward from previous years. If you haven't yet opened an account and were 18 in 2009, when the program started, you would be able to put $41,000 into a TFSA account this year.
What can I hold in a TFSA account: The investments allowed in a TFSA are generally the same as allowed in your RRSP account. They include cash, mutual funds, stocks, guaranteed investment certificates, bonds and certain shares of small business corporations.
What happens when I withdraw money from my account: You do not pay tax on any interest or investment gains when you withdraw money from a TFSA account. Withdrawals also do not affect eligibility for income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit. The amount of money that you withdraw from a TFSA account can be deposited back into your account in the following year. For example: If you withdraw $15,000 from your TFSA account in 2015, you can put that amount back into your account next year. So in 2016, you can put in the $15,000 you withdrew plus your $10,000 annual contribution for a total of $25,000, assuming you have no other contribution room left over from past years.
How are they different from RRSP or RRIF accounts: Contributions to TFSA accounts are not tax-deductible compared with RRSP contributions, which generate a deduction when you file your income tax return. However, when you take the money out of a TFSA account, you do not pay tax on any investment gains that you might have made. Money taken out of an RRSP or RRIF account in retirement is taxed.