TFSA - 6 TIPS

6) KNOW YOUR LIMITS

TFSAs started in 2009 with an annual contribution limit of $5,000. The contribution limit is indexed to inflation, and the limit for 2012 will be $5,500. This means that if you open a TFSA for the first time in 2012, you will have $20,500 worth of room available (assuming you are at least 18 as of 2009).

5) WATCH OUT FOR TRANSFERS

Investments transferred from your non-registered account into your TFSA is considered a deemed disposition. This means you will be paying taxes on any gains when it comes time to file your taxes. It is also important to note that if you transfer your holdings from your non-registered account into your TFSA, and the positions are in a loss, you are unable to claim this loss, as it is considered to be a superficial loss (buying back the same position within 30 days).

4) JANUARY 1ST

Money taken out of your TFSA isn't added back to your contribution room until January 1st of the following year. For example...You deposited $15,000 into your account in September of this year, and now you want to withdraw the whole thing. You are now unable to contribute to your TFSA until January 1st, 2012 (otherwise you are in over contribution)

3) YOU CAN'T BEAT THE TAX MAN

 You cannot purposely over contribute if you think the 1%/mth over contribution penalty is worth it. If you purposely over contribute then the government will take a 100% tax on whatever you made on the over contribution. This used to be a loop-hole that the government quickly closed by levying a 100% tax on the gains made on deliberate over contributions.

2) UNDERSTAND DISTRIBUTIONS & DIVIDENDS

 Distributions or dividends that are reinvested do not impact your contribution room. If you decide to have them paid out in cash then they will be treated like withdrawals and that amount will be added on to your contribution limit January 1st of the following year.

1) GROW YOUR TAX SHELL

 Being able to grow your tax shell within your TFSA adds to the benefits of a TFSA. For example, you put $15,000 into your TFSA in September and somehow you defy the horrible markets and now your account is valued at $20,000. You then decide to withdraw the $20,000 today ($5,000 profit). Once January 1st rolls around you are now able to contribute what you took out ($20,000) + next years limit ($5,500). While most people will have a limit of $20,500, in 2012 you have essentially grown your shell to $25,500 by your smart investing. Keep in mind that if you lose money the same works in reverse and hurts your shell.

The TFSA is a great way for Canadians to save money for any purpose. Making sure you understand the rules about the TFSA is the best place to start.

If there are other questions about TFSAs, feel free to reply to this, and I (or other's on Pinnacle) will try to answer them.