Info on the Tax-Free Savings Account (TFSA)

Here’s a little information concerning TFSA that I was mistaken about. I’m sharing this information with you inc ase you thought the same thing as I.

As far as I thought, I could have $5K inside a TFSA for this first year. It also says I can withdraw money if I need to without any penalties.

So I had assumed that it would work in the following manner:
Input $5K – Total $5K
Take out $1K – Total $4K
Replace that $1K – Total $5K
Take out $2K – Total $3K
Replace that $2K – Total $5K

In the end of the year, I would still only have $5K in the account. Beauty!

But it doesn’t work like that. You are only allowed to CONTRIBUTE $5K in total for the year. In the above scenario, I would have contributed $8K.

So in the end, it didn’t work out like I thought and I guess I’ll just keep whatever money I have in there now but I’ll have to go back into the land of regular old savings account.

Case in point, sounds like the TFSA is great for people with $5K (or less) that they want to save for a rainy day. For people like me, not so much.

I guess upon thinking about it, it still is a decent place to shelter some money. For example, I save up money off of every paycheque for property taxes. My property taxes definitely are not over $5K in the year so it’s a nice place to keep the money until I have to pay them. But ideally, if I had money that I simply wanted to save, this is the place for it.

Invest in comics books I say!

Fast Fact (Other) – Dave from work told me that if you don’t pay back the minimum payment from the Home Buyers Plan (RRSP), the Government simply taxes that amount on that years’ taxes. Interesting. I had assumed that you NEEDED to deposit the money back into an RRSP. I guess not. It makes sense in a way…it’s the same as depositing and then taking it out as a withdrawal for the year for yourself.

*update* Peter left a great comment concerning TFSA that I felt should be posted up here in the front.  Thanks Peter!

Example.

Year 1

Allowable contribution = $5K

Contribute $4k
Invest in a gold mine and grow the TFSA by $20K
Withdraw $10K for some home renos.

Year 2

Contribution limit is total of:

$ 1K – Unused contribution room from previous year
$ 5K – Annual contribution amount
$10K – funds withdrawn in previous years.
=====
$16K Total

Once again, any contributions not made in year 2 carry forward to year 3 etc.