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 of different products and a couple of different ways that you can access your money. At Motor City, we offer TFSAs 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 if a TFSA is right for you depends on your financial goals, but one big thing you have to look out for with a TFSA: Contribution Limits.
ATTENTION - Contribution limits are critical to consider. Please read this section carefully.
The government sets Contribution Limits each year. The 2023 limit is $6,500, but the lifetime limit for 2023 is $88,000. If you’ve deposited money over the years, subtract that number from your total lifetime limit to reach 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 If you do, the Canada Revenue Agency (CRA) will assess a 1% penalty on the monthly excess contribution until it’s withdrawn.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 can access the funds again, and term Deposits will generally have a higher interest rate.