ATB Financial’s Tax-Free Savings Account (TFSA)
Every Canadian resident 18 years of age or older is eligible to save or invest up to $5,000 every year in a registered Tax-Free Savings Account (TFSA). Investment income or capital gains earned in a TFSA are not taxed… ever.
Considered the most important personal savings vehicle since the Registered Retirement Savings Plan (RRSP), the TFSA allows you to save for the short and long term, tax-free. Whether you want to diversify your retirement income, save for a vacation or a down payment on your first home, an ATB TFSA can work for you.
Like an RRSP, there are many different investment products you can choose from in a TFSA, including:
Discover more:
Need more information on saving or investing? Check out these valuable information sources:
A Great Way to Save
It’s one thing to say that the ATB Tax-Free Savings Account is a great new flexible way to grow your savings tax-free. It’s another to understand exactly what that means.
For your investments, it means you can:
- Grow your money tax-free. Money earned or withdrawn from your Tax-Free Savings Account is non-taxable. All interest, dividends, or capital gains earned are tax-free.
- Withdraw funds at any time with no penalty. If you withdraw from the account, the amount withdrawn is added to the next year’s contribution limit.*
- Collect federal benefits without deductions. Old Age Security, Guaranteed Income Supplements, Employment Insurance and Canada Child Tax Benefits will not be impacted by TFSA withdrawals.
- Carry forward your contribution room. It never expires.
- Create tax-free savings even if you’re over 71. There are no age limits with a TFSA. So once you are done investing in an RRSP or, if you have more retirement income from your Registered Retirement Income Fund (RRIF) than you need, just invest it in a TFSA.
For you, it means you can:
- Save for anything you want. A recreational property, an emergency fund, a new car, your first home… the possibilities are endless.
- Supplement your retirement savings.
- Create additional savings for medical costs, vacations, or other expenses, without reducing federal benefits.
- Minimize taxes and maximize retirement income by having both RRSPs and TFSAs.
- Use ATB TFSAs to split your retirement income between you and your spouse.
- Reinvest your retirement income. There are no restrictions on withdrawals or on how long you continue to save.
Get the opinion of financial experts in the media.
*The amount cannot be re-contributed in the same year.
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Differences between a TFSA and an RRSP
You can get the same tax-free growth protection within a TFSA or an RRSP, but there are differences.
| |
RRSP |
TFSA |
| Eligibility |
Anyone who earned income subject to Canadian taxation, including non-residents |
Any Canadian resident age 18 or over |
| Maximum annual contribution limit |
Your allowable RRSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit for the taxation year, or
- The remaining limit after any company sponsored pension plan contributions
|
$5,000 per year, indexed to inflation |
| Contributions are tax deductible |
Yes |
No |
Investment gains are taxed
(interest, dividends, and capital gains) |
Yes, it grows tax free while invested, but is taxable at your marginal tax rate when withdrawn |
No |
| Withdrawals are taxed |
Yes, unless withdrawn using the Home Buyers Plan (HBP)* and the Lifelong Learning Plan (LLP)** |
No |
| Unused contribution room can be carried forward |
Yes |
Yes |
| Withdrawals can be re-contributed in future years |
No, unless withdrawn using the HBP or LLP |
Yes*** |
| Contribution limit may be reduced by Employer Pension Plan contributions |
Yes |
No |
| Implications when you reach age 71 |
Four options:
- withdraw your RRSP as taxable income,
- transfer it to a Registered Retirement Income Fund (RRIF) before or on December 31 of the year you turn 71,
- purchase an annuity that guarantees payments for a fixed term or as long as you live, or
- a combination of any of the above
|
None |
Notes:
*HBP allows you to withdraw up to $20,000 to buy or build a home for yourself or a relative with a disability.
**LLP allows you to withdraw money to finance training or education for you, your spouse, or your common-law partner.
***TFSA Withdrawal amounts cannot be re-contributed in the same year.
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RRSPs, TFSAs and Unregistered Savings Compared
Speaking of comparisons, how do they add up in terms of after-tax returns? Is there any difference between how much you make from each investment? Since one investment is made with pre-tax dollars (RRSPs) and the other from after-tax dollars (TFSAs), does it make a difference when you’re ready to withdraw the money? In fact, as you see in the table below, if they’re withdrawn at the same time with the same tax rate, they’re equal in terms of net investment. (You’ll also notice in the table that the TFSA and the RRSP have higher after tax rates of return compared to unregistered investments. This is one of the benefits of registered investments.)
| |
RRSP |
TFSA |
Unregistered Savings |
| Pre-tax income |
$1,000 |
$1,000 |
$1,000 |
| Tax (30% rate) |
$0 |
$300 |
$300 |
| Net contribution |
$1,000 |
$700 |
$700 |
| Investment income (20 years at 5.5%) |
$1,918 |
$1,342 |
$966** |
| Gross proceeds (net contribution plus investment income) |
$2,918 |
$2,042 |
$1,666 |
| Tax (30% rate) |
$875 |
$0 |
$0 |
| Net proceeds |
$2,042 |
$2,042 |
$1,666 |
Given their complementary nature, whether to save in a TFSA, an RRSP, or both will depend on your particular savings needs—think short term, longer term, and retirement—as well as your current and expected future financial situation and income.
Notes:
*Example taken and modified from Canada Revenue Agency.
**The tax rate on this unregistered investment is 28%.
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Scenarios
Because each has its own distinct features, how you invest and what you invest in really depends on your unique goals and financial situation. The following are common scenarios that may help you understand your options. That said, we strongly advise you speak to an ATB investment specialist to assess what combination of investments is best for you.
| If you want to... |
RRSP |
TFSA |
| Have a lower tax bill |
Contributions are tax deductible, which means you can reduce your taxable income for each year that you make a contribution. Also, your savings grow tax-free until you withdraw them. |
Investments grow tax-free, and you aren’t taxed when you withdraw. However, your contribution is not tax deductible. |
| Have access to your money without tax consequences |
Withdrawals are taxed at your current marginal income tax rate. |
Investments grow tax-free, and you aren’t taxed when you withdraw. |
| Ensure your investments don’t affect your federal income benefits |
Withdrawals are considered income and may decrease federal income benefits. |
Withdrawals will not affect federal income benefits. |
Tip: You may want to have both an RRSP and a TFSA to create flexibility in your retirement income. You can use your TFSA for medical expenses, vacations, and supplementary income, and the extra income won’t reduce your federal benefits.
|
| Save for a down payment on a house |
If you use your RRSP with the Home Buyers Plan, you will get an upfront tax deduction, but the amount withdrawn will not grow until that amount is repaid. It must be repaid within 15 years of withdrawal. |
Your investments will grow tax- free (interest, dividends or capital gains) and you will not be taxed when you withdraw. Any withdrawals will simply increase your contribution room in the following year. |
Tip: You may want to have both an RRSP and a TFSA, if you can. If you start early with an RRSP, you get the benefit of compounded growth that will add up for retirement and potentially a tax refund that you could put into your down payment savings. Plus, if you don’t borrow against your RRSP for a house, that growth will not be impacted for your long term.
|
| Buy a new car, or go on a vacation |
You can withdraw, but all withdrawals are taxable and your contribution room will be lost. |
Your investments will grow tax- free (interest, dividends or capital gains) and you will not be taxed when you withdraw. Any withdrawals will simply increase your contribution room in the following year. |
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Frequently Asked Questions
Why should I invest in a registered account?
That one’s easy. Invest in a registered account for tax-free growth. Tax-free growth equals more money in your pocket. Check out our online tool: Registered (RRSP or TFSA) vs. Non-Registered Comparison.
What’s better, a TFSA or a Registered Education Savings Plan (RESP)?
Both are excellent savings plans for the future. A TFSA can be used even if no post-secondary plan is chosen and there will be no tax implications. An RESP does offer the added benefit of government incentives to save. You may want to put enough in your RESP to maximize grants and bonds from the government and then put additional savings into a TFSA to get more flexibility. For more information, check with an ATB investment specialist. More information on RESP's.
To determine what is best for your investing needs, talk to an ATB investment specialist at your local branch today or call 1-888-404-4646.
