Advice- I still don't get TFSAs

For the past couple of years I've maxed out my TFSAs in an savings account only- obviously the interest is next-to-nothing so I'm looking at other options, but I don't understand how anything other than a savings account works in terms of not going over the max contribution. Please give me advice! Especially in regards to the following questions:

If I put $5500 in a 5-year GIC today, does this count only as my 2013 contribution or my contribution for each of the next 5years? Does the earnings from interest become taxable after 2013, for the remaining 4 years? Is it tax-free when i cash-out (or whatever it's called) in 2018? if so, does it count towards my contributions in 2018?


Basically, how do I buy GICs (or possibly mutual funds) without going over the max?????? I'm only in my early 30s and want to make the most out of this tax-free option because neither my husband nor I have retirement savings (yet).

any other advice is welcome too!! TIA!

Tax free accounts are just that...tax free on whatever interest or other growth you get forever! They are meant as a true savings method, so if you take out money you cannot replace it in that year--ie you really can't use it as a general savings account. If you put in (now, this does not include any profits the money makes) over the max limit you will be penalized, so be careful. If you want a good return right now without risk People Trust offers 3% daily interest....too bad you just put it in a 5 year term as there is a good chance that rates are going up sooner rather than later. If this is your first deposit you have lots of room...you can make up what you did not put in since the program began Check out this website for all the information you need http://www.tfsa.gc.ca/

The name "Tax free savings account" is a bit misleading, is not actually a 'savings account' but more of an umbrella that shelters all your investment income from income tax. Once the funds are in a TFSA they can be used to purchase GIC's , mutual funds or stocks. When you purchase one of these investments they actually stay in the TFSA account; you simply transferred them into another investment. Whoever you hold your TFSA with will be able to sell these products to you and help move your cash part of your TFSA into a gic/mutual fund within the TFSA. The income in a TFSA remains tax free as long as it is in the TFSA. So if you purchase a 5 year GIC all the income you earn in that GIC will be tax free (seeing as since its locked in it will not be able to be taken out of the TFSA). Another example would be if you held a mutual fund in your TFSA for 2 years and made a gain that gain would be tax free, if you were to take it out of the TFSA and reinvest it into a non registered account you would only be taxed on the income made from the date it was withdrawn onwards. As far as purchasing, if you have room and are not maxed you can do a new investment from your bank account which will count as contribution, if you are maxed or do not have enough funds to invest from your bank account you can just exchange some of your 'cash' into the investment within your TFSA which will not effect contribution room.

A tidbit on GIC Vs Mutual funds. I would not necessarily recommend a 5 year GIC at this point, interest rates are at record lows and we are now seeing signs they should be moving up within the next 2-3 years, in my opinion you are better off investing into a 2 or 3 year instead of locking in your funds at a low rate for 5 years. Since you are considering investing for 5 years and mentioned retirement I imagine you do not plan to use the funds for a very long time? If this is the case I would really look into mutual funds as you will probably make a lot more over the long term from this investment. It will move up and down often and you could even see your money decline in value during the first year but mutual funds are a long term investment and history shows over time they outperform GIC's. This is however something your adviser can talk to you about but do mention it and have him.her educate you on the possibilities.

TFSA is a great vehicle for retirement savings, everyones financial situation is different but if your annual income is under 43,000 TFSA will def be your best bet vs RRSP's since your tax bracket now vs retirement will not change much/ at all and during the next 30 years your investment will grow absolutely tax free where in a rrsp it will not. The industry likes to think RRSP's are fit all situation but that just plain isnt true, especially now that we have TFSA's.

As far as the limit is concerned, for the first four years the limit was $5000 PER year and it was raised this year to $5500 . This contribution room accumulates, so if you do not have $25,500 in your TFSA right now ( not including growth) then you still have room to contribute.
UNLESS you took some out this year, in which case you have to wait until after Jan 1st to put it back. Next year, you will be able to have $31,000 (plus growth) in your TFSA.
and Orbital is correct.... You do Not just have to have your $$ in a savings account. You can use mutual funds, etf's, stocks... Anything you can hold in an rrsp you can hold in a TFSA.

Didn't I see a notice about the Fed Gov't capping how much interest income in a year one's TFSA can earn-$500? Guess not.
I see that TFSA limit for 2013 is $5500. I did not realize you can have more than one TFSA but the annual limit does not permit $5500 contributions per account. Limit acts as total limit for all the TFSAs combined. http://www.cra-arc.gc.ca/tx/ndvdls/t...trbtn-eng.html

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Originally Posted by Ciel

Didn't I see a notice about the Fed Gov't capping how much interest income in a year one's TFSA can earn-$500? Guess not.

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I think that would be odd that they'd put a cap, because it would defeat the purpose of the TSFA.

As far as the limit is concerned, for the first four years the limit was $5000 PER year and it was raised this year to $5500 .

In english please :wink: