An overview
One of the most important things that come to our mind when we hear about a Tax-free savings account would be that we can enjoy the benefits of a tax-free savings account. However, the truth is that the money deposited in the TFSA is the after-tax contribution. It means the money deposited in the Tax-free savings account is already taxed, and the bank will not tax the income. Even though it is known as a savings account, we can deposit investments from Mutual funds, securities, and bonds apart from cash. What is a Tax-free savings account all about? Let us learn in detail.
What is a Tax-free savings account?
Most of us have doubts when it comes to TFSAs. What is a Tax-free savings account? Is it worth it? TFSAs are registered tax-advantaged saving accounts that help us earn tax-free money. Moreover, it is like a basket that can help to hold additional investments like Mutual Funds, bonds, and more that can generate interest, capital gains, and more. Whether we are saving it for our big day, investing in a property, or for other goals, a Tax-free savings account is the best financial backup we can depend on. These accounts are helpful for Canadians who wish to invest money and save them for their future.
How to open a Tax Free Savings Account?
We know what a tax-free savings account is all about. Now, how to open a Tax-free savings account? To open a tax-free saving account, we must first decide how many types of savings accounts we are planning to open because we can open more than one TFSA at any time. Here is how to open a tax-free savings account:
Contact the financial institution we are planning to open the TFSA.
Firstly, contact the financial institution nearby. Be it a credit union, insurance company, or any other financial institution. Contact them online or visit their nearest branch to know more about the TFSA opening process.
Provide a valid Social security number and DOB along with supporting documents.
As a second step, provide a valid social security number or SIN and our DOB. Moreover, submit supporting documents for verification of the same. Further, ensure that we have provided the correct information.
Apply for TFSA through retail banks.
We can also apply for the TFSA through retail banks. They help in creating a sustainable and inclusive future. We can book an appointment or apply for the TFSA online.
Fund the TFSA with contributions.
Once the savings account is opened, fund the contributions in the account. Ensure that all the funding meets the total contribution limit. And doesn’t exceed the same.
Who can open a Tax-free savings account?
To open a TFSA, there are certain eligibility criteria. Only if the individual falls under these criteria can they apply for a tax-free savings account. These are the eligibility criteria:
The individual should be a citizen of Canada.
For applying TFSA, an individual should belong to Canada and must be a proper citizen of the country. Further, they should have valid address proof to prove that they reside in Canada.
He/she should be 18 years and above.
The individual must be legally 18 years of age or above to apply for a tax-free savings account. Moreover, we have to have a valid birth certificate to prove that we are 18 years and above.
They should have a valid SIN or Social security number.
The final and most important criterion is a valid social security number. Only if the SIN is valid can we open a Tax-free savings account.
Pros and Cons of TFSAs
There are different pros and cons of Tax-free savings accounts. They are:
Pros
- All the growth of the savings account grows without being cut by taxes.
- Earned income is not necessary for opening a TFSA.
- Unused savings are moved on to subsequent years. And it lets us contribute more.
- There are no withdrawal restrictions, and we can withdraw any amount at any time. And it is absolutely tax-free.
- Government programs don’t affect the TFSAs.
Cons
- The contribution we make are not tax deductible.
- If the fund contributions are more than the given limit, then they are taxed.
- Non-Canadian residents’ contributions are taxed while in the account.
- We have to file for a TFSA return by the end of June 30th of the year in case the amount is taxed.
- They are unprotected from creditors.
FAQs
Q. What is the purpose of a Tax-free savings account?
The purpose of a Tax-free savings account is to hold different qualified investments like Mutual Funds, personal contributions, dividends, and more and earn tax-free money.
Q. Can we withdraw money from our Tax-free savings account?
Yes, we can withdraw any amount of money at any time from our tax-free savings account. Further, no amount is reduced from the total amount of the yearly contributions.
Q. Are the account withdrawals tax-free?
Yes, the account withdrawals are tax-free. And we can withdraw any amount of tax-free money at any time.
Conclusion
Overall, tax-free savings accounts are Canadian savings accounts that help us to earn tax-free money from our contributions. Moreover, it also helps us to hold various qualified investments like mutual funds, dividends, personal contributions, and more. However, the contribution limit has to be limited to avoid taxes on the same.
Furthermore, account withdrawals are tax-free. So, there are both pros and cons of tax-free savings accounts. But ultimately, it is the choice we make that decides whether our TFSA account is advantageous or not.
