Canadian TFSA account: Have you fallen into these traps?
Living in Canada, you're no doubt familiar with the Tax-Free Savings Account (TFSA)! Since 2009, Canadians have been saving money in TFSAs and enjoying the benefits of tax-free investment growth. But did you know that this seemingly promising account could put you at risk of taxation if you're not careful?
The "trap" of over-contribution
Many people may have over-contributed because they set up pre-authorized contributions in their TFSA accounts and made extra contributions without verifying their available balance, or they may have opened multiple TFSA accounts at different financial institutions but failed to properly track their contributions. 😱 Once you exceed the limit, it can be troublesome. The Canada Revenue Agency (CRA) will impose a 1% tax on each month of excess contributions in the account! The CRA will also notify you through an account notification letter or email, and at this time, you will be in tears😭
How is the contribution amount calculated?
Your TFSA contribution room is made up of three parts: the annual TFSA dollar limit, any unused contribution room from previous years, and any withdrawals made in previous years (excluding direct transfers). The annual limit for both 2024 and 2025 is $7,000. Be sure to calculate this carefully to avoid accidentally exceeding your limit!
How do I track my contribution room?
You can track your TFSA contribution room using your Canada Revenue Agency (CRA) account. Once logged in, you can check your contribution room, ensure your TFSA is registered with the CRA, and review your account transactions. While financial institutions can help you track your contribution limits, knowing your own balance is crucial. 🤔 Be sure to carefully track your TFSA transactions to avoid over-contributing!
What to do if you make excess contributions?
If you accidentally exceed your annual contribution limit, the CRA may send you a letter notifying you that you may have to pay tax on the excess amount. Don't panic, however; withdrawing any excess contributions as soon as possible can reduce your tax liability. If you believe your situation is unique, you can write to the CRA and request a full or partial exemption or cancellation of your tax liability.
Hey guys, while TFSA accounts are great, you need to understand the rules clearly, otherwise you might end up wasting money! Have you encountered any problems using your TFSA account? Share your thoughts in the comments section!
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