3 Things You Should NOT Do in Your TFSA Account

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A Tax-Free Savings Account (TFSA) is a popular investment tool for Canadians to grow their savings tax-free. All your investments inside the TFSA grow free of taxes on capital gains, interests, or dividends, and the funds can be withdrawn at any moment with no penalty. It’s a useful registered investment account for short and long-term goals. But, there are certain rules and guidelines that you need to follow in order to avoid disputes with the CRA. Here are 3 things you should avoid doing in your TFSA account to prevent any potential penalties or fines.

1. Trading: One important rule that a lot of people are not aware of is that the Canada Revenue Agency (CRA) does not allow trading within your TFSA account. While TFSA investments are intended for short and long-term growth, actively trading securities or conducting frequent transactions can be seen as running a business within your account. This violation can lead to significant penalties and fines imposed by the CRA. It’s crucial to understand that TFSAs are designed for investment purposes, not for day trading, swing trading, or running a business.
2. Depositing more money than your limit: Every year, the CRA sets a contribution limit for TFSA accounts. It’s important to be aware of your contribution limit and not exceed it. The TFSA contribution room is determined by your annual contribution limit, which accumulates over time since you became 18 years old. For newcomers, the limit starts in the calendar year when arriving in Canada. If you overcontribute to your TFSA, you will be subject to a penalty tax of 1% per month on the excess amount until it is removed from your account. It’s essential to keep track of your contributions and be aware of the CRA guidelines or consult with a Financial Advisor to ensure you stay within the permissible limits.
3. Withdrawing money and putting it back in the same calendar year: Another crucial rule to remember is that once you withdraw funds from your TFSA account, you cannot immediately put them back in the same calendar year. If you withdraw funds in a particular year, the amount you withdrew can only be re-contributed starting from the following calendar year unless you have contribution room left. Attempting to deposit the same amount in the same year could lead to an overcontribution. You should wait until the next calendar year before re-contributing the funds you withdrew if you don’t have any contribution room left.

Wrapping up, a TFSA account provides a great opportunity for Canadians to grow their savings tax-free. However, it’s essential to adhere to the rules and guidelines set by the CRA. Avoiding trading within your TFSA, staying within your contribution limits, and refraining from re-contributing withdrawn funds in the same calendar year are critical steps to ensure you make the most of your TFSA while avoiding penalties and fines. By being mindful of these 3 key points, you can effectively manage your TFSA and maximize its benefits for your long-term financial goals.

THIS IS NOT INVESTMENT ADVICE

This article expresses my own opinion. Nothing contained in this article should be construed as investment advice.