Can I have more than one TFSA accounts? Can I have two TFSAS? What is a TFSA?!!
Don’t worry folks, I gotcha.
The tax-free-savings account is one of the most misunderstood type of account in Canada.
I think the question of whether someone can hold more than one TFSA crops up so often because people don’t actually get the function of a TFSA.
The TFSA is simply an umbrella that shields your money from taxes as you grow it and when you withdraw it.
It tells the tax-man to buzz off, “I’m here growing my money, dickwad! I already paid you my cut when I earned it and now it’s all mine to keep. Go bother that dude down the street.”
In a regular savings or brokerage account you need to pay taxes on any income earned. That could be interest you collect from a savings account, GIC or bond, income you earn from a dividend paying stock, or a capital gain from selling a stock.
In a sheltered account, the most popular being RRSP and TFSA, you earn money the exact same way: by collecting interest, income or selling stocks.
The only difference is that the tax-man doesn’t get a cut as you’re earning money.
The TFSA is not a thing in itself – it’s just a label added to a savings or brokerage account which acts as a big STOP sign to the tax-man: “Here ye may not enter.”
So it doesn’t really do you any good if you’re like one of my friends who tells me, ”I have a TFSA,” or “I put money in my TFSA.”
Because what most people mean by that is that they opened up a TFSA savings account at their bank and dumped in a lump sum.
Because of today’s uber-low interest rates, it’s literally the same as saying “I put money in a savings account.”
Yes, you will save the taxes you have to pay on the $5 a year you earn from your TFSA High Interest Savings Account. Congrats. Good job. Totally useless.
You might as well have just put the money in a normal savings account, becuase you’re not utilizing the purpose of the TFSA.
That’s because the function of a TFSA is to protect growth. What’s important is not that you have a TFSA, but what you’re doing with the money INSIDE of the TFSA. What are you doing to grow your money? What financial products are you purchasing? Bonds or GICs? Are you investing in equities like stocks or ETFs? (Here’s 3 easy TFSA investment ideas to help you get started.) Once you stop asking yourself “if you have a TFSA,” and start asking yourself “How am I growing my money within this tax-sheltered account” you’ll start intuitvely being able to answer any TFSA questions yourself. Such as…OF COURSE you can have more than one TFSAs. You can only contribute across all your accounts a maximum of $5,500 a year, so track this carefully, but you can have as many TFSAs as you want. In the same way you can have 3 different savings accounts and 2 different financial products and 2 different brokerage accounts, go nuts with the TFSAs. I personally have a 5-year GIC in my TFSA savings account at Implicity, a TFSA account at Tangerine in which I hold an ETF and a TFSA brokerage account at Questrade in which I buy stocks. Okay, okay, I’m a little TFSA crazy, but that’s because I want to be rich and be able to afford brand-name beans when I’m retired. Heinz fur-ever yo.
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A small correction regarding a RRSP, the money isn’t locked in until you retire or buy a home, you can withdraw money, however you will have to pay tax on the withdrawal.
One cautionary note on TFSA’s, if you take money out, you can’t put money back in until the following year. For example, you take out $1000.00 out in 2015, you can’t put any money in until Jan. 2016, all kinds of penalties if you put money back in 2015.
Isn’t there also penalities for withdrawing early from your RRSP?
Sorry, this is a long answer: The government doesn’t want to wait until you file your income tax return to get their tax money so there is a withholding tax on the withdrawal. That withholding tax is a tax credit that you get when you file your return. The only penalty is the loss of contribution room.
For example: your salary is $30,000 a year times 18% gives you a RRSP contribution of $5400.00 You put $5000.00 into your RRSP then take it out the next year. You will only get $4,500 in cash and $500.00 will go to CRA but your contribution room is down to $400.00 You would have to wait another year for more contribution room based on your salary. So if you got a raise to $32,000 then your new contribution room (32,000 X 18% = $5760 + 400 = $6160.00
10% withholding tax on $1.00 to $5000.00 withdrawal
20% withholding tax on $5,001 to $10,000.00
30% above 10,000.00
Now a group RRSP from work may have some locked in rules, like you don’t get the company’s matching portion unless you stay in the plan for three years. But you can always take out what you put into the plan.