Hi Guys, Thomas Here.
Today, i want to talk about the Tax-free saving account.
It’s one of the Canadian’s favourite account and it’s also mine as well.
It’s a great tool to begin with your investment journey.
In the next five minutes,
i will go through the benefits of having a TFSA and how does it compare to RRSP.
If you want to know about investment and taxation then this video will definitely be useful to you
If you are new to this channel. My name is Thomas C Chan
and this channel is to share knowledge, habits, and mentality
so we can improve our finances better.
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TFSA was created back in 2009 by the canadian government
and Its purpose is to encourage Canadians to save
or I should say to invest without paying tax on the growth.
But how does taxation really impact us?
We have 2 examples. In the first scenario, we have a dollar here
and every time we invest and it doubles the return.
So from 1 dollar to 2 dollars. Then again becomes 4 and then 8…
we do that for 20 rounds.
The dollar now becomes 1 million and forty eight thousand dollars.
And that’s the power of compound growth.
For the 2nd scenario, we have the dollar and double the return as well.
But each time it doubles, the government comes in and take 30% on the growth as tax.
Therefore, instead of 2 dollars, now becomes 1.70, then 2.89.
We do that for another 20 rounds, how much do you think it becomes now?
The answer is $40,642
which means the difference of that 1-million-dollar goes into the CRA pocket.
And if you choose not to pay in time,
you are penalized for a bigger fine or be thrown to jail.
Therefore, smart investors always utilize tax sheltered accounts for their investment.
Once you turn 18 years old, or 19 in some provinces like British Columbia.
You can open and contribute $6000 to the TFSA.
The room accumulates and reset every year.
Let’s say you are 18 years old or even older back in 2009,
today you can contribute up to $69500.
Similar to RRSP, there are 4 platforms you can choose to open a TFSA account.
There are the banks, insurance companies, investment firm or the brokerage.
And for each account, you have various choice of investments
for instances, saving account / term deposit, Bonds, ETF, mutual fund stocks.
All depend on your goals and risk of tolerance.
The big question is should I invest in TFSA or RRSP first?
First you have to consider if you are in a high or low tax bracket.
Next, think about the time horizon that you have this money saved.
For RRSP, it is designed for retirement by lowering the income tax
where TFSA is like for everything else in your life.
If there is a withdraw from the TFSA, the contribution room resets at January 1st of the following year.
But for RRSP, once it’s withdrawn, the contribution room does not increase back
Generally speaking, TFSA is simple and very effiective tax sheltered account
but it is not perfect. First the contribution room is $6,000 per year now,
to some people the room is not enough to shelter for a large transaction such as inheritance or home sell-off
Second, if you have foreign equities,
say a US blue chip ETF or stock that generate dividend.
The US tax bureau will charge a 15% withholding tax. Vice Versa, a RRSP can do that completely tax sheltered.
Lastly, TFSA is not recognized by the US government.
They will consider TFSA as a foreign income.
For US tax residents who has a TFSA in Canada might result in tons of paper work and more tax need to be paid.
That's pretty much the breakdown for the TFSA.
Do you like this account? And usually what kind of invest do you do with this account?
Comment below!
As always, thank you so much for watching and I’ll see you in my next video