Everyone finds it tough to make ends meet in today’s world, especially for young parents. The young parents have to pay off their education loans, child’s education, and their living costs, all from the low salary that the beginner jobs give. Considering this, saving for their child’s future is a bit difficult but not impossible.
TFSA was introduced keeping in mind the problems that the young generation face. TFSA, a Tax-free Savings Account, helps you start your savings as soon as you turn 18. It will benefit you in numerous ways. With TFSA, you don’t have to pay any tax while saving, investing, or withdrawing your money. You can ask your parents or grandparents to guide you to save money more efficiently once you turn 18. You can also check this article for more details.
TFSA allows you to make savings in different forms such as cash, mutual funds, stocks, bonds, and exchange-traded funds. You have to be careful as there are investment risks unless you invest in GIC.
Let us dive in and understand the details in a better manner.
Age criteria for TFSA
The citizens can open the TFSA savings account when they reach the age of majority, But the age of the majority of the citizens of Canada depends on the province they are living in. If you are a resident of Alberta, Ontario, Manitoba, Quebec, Prince Edward Island, and Saskatchewan, then the age of majority is 18 years.
But if you are a resident of British Columbia, North West Territories, Yukon, Nova Scotia, New Brunswick, Nunavut, and Newfoundland & Labrador, then your age of majority is 19 years. But since the TFSA falls under the criteria of federal programs, any citizen above 18 years can open a TFSA savings account regardless of where they reside in Canada.
If you are turning 18 this year but don’t have the money to start a TFSA account, you can create it the following year by depositing the contributions for both years together. This is possible because the gifts are accumulated from the year you turn 18.
Role of parents
Usually, if the child is under 18, the parents open a trust account for their future. Here, the parent is responsible for the entire account handling process, including depositing funds, investing, withdrawing, etc.
As a parent, you can help your child understand the importance of savings and guide them in the procedure but cannot interfere in any decision regarding the deposition, investment, or withdrawal of the funds. The child has to do it himself.
TFSA contribution room
The TFSA Contribution Room limits the maximum amount that individuals can deposit every year in their TFSA savings account. The contribution room starts the collection from the year the account holder turns 18. The unutilized portion of the contribution room can be pushed off to the next consecutive year.
If the contribution room for an account is $6,000, but the holder deposits an amount of $3,000, the remaining $3,000 can be paid along with the $6,000 of the following year. The account holder can produce a total amount of $9,000 in the upcoming year. The contribution room for an individual depends on the year of account opening as the contribution room may change.
Types of TFSA
While opening a TFSA account, you must consider what type of account you want to start.
The TFSA issuing bodies include banks, insurance companies, trust companies, and credit unions. You are free to choose the type of TFSA account and the issuer issuing your TFSA account. You can choose from the three types of TFSA accounts given below:
- Deposit
- Annuity Contract
- Arrangement in trust
Types of permitted investments
For the security of your money and to avoid people from losing their investments, there are some rules that you abide by when investing with TFSA. With TFSA, you can make safe investments as it does not allow all investments, but it selects ways to invest your money. According to the regulations, TFSA permits only the following types of investments:
- Cash
- Bonds
- Mutual Funds
- Designated stock exchange
- Guaranteed investment certificates
- Small business corporation shares
Withdrawals from a TFSA
TFSA allows you to withdraw any amount of money at any time without reducing your total amount of contribution for the year. The withdrawals depend upon the type of investments you make. The TFSA account does not consider a qualifying transfer from one TFSA to another TFSA account. If you think re-contributing to your TFSA account in the same year you made a withdrawal, and you have no contribution room left, the re-contribution will be considered an excess contribution and subject to tax at the rate of 1%.
Tax payable on TFSA
You don’t have to pay any tax generally on the interest, gain, or dividends on the investments in a TFSA account. However, you are responsible for paying taxes under a TFSA account in the following cases:
- On excess TFSA amount
- On non-Canadian resident Contribution
- On prohibited or non-qualified investments
You don’t require any TFSA return if you are not in a situation where the taxes are payable. But if you are accountable to pay the taxes, you have to file and send the TFSA return by the 30th of June of the year in which the tax arose.
Endnote
At the age of 18, any citizen of Canada is eligible to open a TFSA savings account to save money for the future. TFSA allows you to save, invest and withdraw funds without paying any tax. As an account holder, you can operate the account and make decisions without interference from an adult, but you can take their guidance.
If you are confused about a dependable TFSA provider, talk to a finance expert now. They will help you choose the right plan for you.
