The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009 as a means to encourage Canadians to save and invest without paying tax on the gains! Although it is called a Tax-Free Savings Account, a better name for it would be a Tax-Free Investment Account since money within a TFSA can actually be invested in all kinds of investment products such as:
- Savings accounts
- Mutual Funds
- Individual stocks
The benefit of the TFSA is that the growth of the investments within it is tax-free. You will not pay taxes on the interest, dividends or capital gains earned. The tax savings allow the TFSA to grow faster than a taxable investment account (because you get to keep more of your returns). You can also withdraw the funds within your TFSA at any time without any tax implications, making it ideal for short or medium-term objectives. Better yet, the money you withdraw will be added back to your contribution room in the next calendar year.
Although the tax-free status of the TFSA is recognized in Canada, the US Government doesn't officially recognize it, so US-company dividends received in your TFSA are subject to a 15% withholding tax. Don't worry, we take care of those for you so there's no effort needed on your end or any paperwork to file with the IRS.*
Additionally, if you withdraw from your TFSA and want to put back the withdrawn amount in your TFSA within the same year, you need to make sure you have enough contribution room left this year OR wait until the next calendar year.
For example, if I have contributed $30,000 into a TFSA and my total contribution room is $63,500, then I only have $33,500 of available room for this calendar year. If I withdraw the $30,000, I still only have $33,500 of contribution left for the current calendar year. I'd be able to contribute up to $33,500 into a TFSA this year but would only get the $30,000 added back to my contribution limit the following calendar year (what I withdrew the year before) + the new year's contribution room.
*There are different implications for US-persons that hold TFSA accounts