A Tax-Free Savings Account (TFSA) is a great tool for saving when used correctly, but you can face penalties if you exceed your contribution limit. It’s easy to accidentally over-contribute, so here are some tips to help you maximize your investments while avoiding going over your contribution limit.
The first and most important thing is that it’s up to you to track your TFSA deposits and withdrawals. Since it’s possible to hold multiple TFSAs at different financial institutions, the responsibility is yours to know how much contribution room you have. All contributions are tracked by the Canada Revenue Agency; visit their Contribution page to find out more.
In addition, while TFSA withdrawals are easy to make, be aware that the amount withdrawn is added to your contribution room for the next year, not the current year.
For example, if your contribution room for 2014 is $5500 and you invest the full amount in January 2014 then withdraw $500 in March, that $500 will be added to your contribution room for 2015.
If you chose to re-invest $500 in 2014 it will count as over-contribution, and you will be taxed accordingly. Over-contributions to TFSAs are taxed at a rate of 1% per month that the excess funds are invested. Visit Canada Revenue Agency’s The Tax-Free Savings Account for more the details about TFSAs.
See these audio slide presentations to learn more about TFSAs:
If you would like to book an appointment to find out how a TFSA can help you reach your financial goals, contact us.