What is a Tax-Free Savings Account?
A Tax-Free Savings Account is more than just your average account. It's so much more. Similar to the RSP term, a TFSA is an umbrella term that contains a couple different products and a couple different ways that you can access your money. At Motor City we offer TFSA's in the form of Term Deposits or similar to a standard Savings Account. Unlike other Registered Plans, contributions to a TFSA are not tax deductible, but that also means that you don't have to pay income tax when you cash in your Term Deposit or withdraw from the account. Of course, deciding on if a TFSA is right for you depends on your financial goals but there's one big thing you have to look out for with a TFSA: Contribution Limits.
ATTENTION - Contribution limits are very important to consider. Please read this section carefully.
Contribution Limits are set each year by the government. The 2020 limit is $6,000, but the lifetime limit for 2020 is $69,500. If you’ve deposited money over the years, just subtract that number from your total lifetime limit to arrive at your maximum contribution. If you've made any withdrawals from your TFSA you can re-contribute them the year after you made the withdrawal.
Don’t over-contribute. If you do, the Canada Revenue Agency (CRA) will assess a 1% penalty on the excess contribution, every month until it’s withdrawn. So make sure you keep track of your deposits throughout the year.
Withdraw from your TFSA want to replace that money? You’ll have to wait until the year following your withdrawal to get that contribution room back.
TFSA as a GIC
Your cash investment (the deposit), which is under your yearly limit, has a guaranteed return at a fixed interest rate over a period of time (the term). Depending on how you set up the Term Deposit will determine the rate of return and when you will be able to access the funds again. Term Deposits will generally have a higher interest rate.