The rules for TFSAs were hashed and re-hashed hundreds of time in the media and consumers STILL managed to go offside. Wow! For those of you who still haven’t opened up your TFSA, here are 9 things you need to know.
1. You must be a Canadian resident and 18 years of age or older. (I actually saw an article recently where someone advised parents to open one of these up for this kids. Not until they’re 18!)
2. You can save up to $5,000 every year. Limits are going to be indexed to inflation in $500 increments, so watch for increases in limits over time. You can have as many TFSAs as you wish, but the $5,000 contribution limit applies across all accounts.
3. Contributions are NOT tax deductible.
4. All the income earned inside a TFSA is earned tax-free.
5. If you can’t save $5,000 this year, your contribution room can be carried forward to future years. So if you can only stick $2K in for 2011, in 2012 your limit will be $8,000 ($5K for 2012 and $3K carried forward from 2011.)
6. You can take money out of your TFSA at any time for any purpose, without losing the contribution room. HOWEVER if you take money out in one year, you CANNOT put it back until the following year.
7. You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds.
8. You can, and should, make a beneficiary designation (everywhere in Canada except Quebec) on your TFSA to avoid probate costs.
9. You can contribute to your spouse’s TFSA without affecting your own contribution limits and without any tax attribution.
Follow the rules carefully, especially the one about taking money out of a TFSA and then putting it back in. If you try to return money to your plan too soon and you’ve already reached your limit for the year you’ll be hit with an over-contribution penalty. And while the government has been somewhat gracious so far, don’t expect them to have an endless amount of patience with folks who claim, “But, I didn’t know…”