What are TFSAs?
Before you make the decision to invest in a TFSA GIC, you should first understand what a TFSA is. Introduced in 2009, tax-free savings accounts (TFSA for short) are accounts that allow Canadians to both grow and withdraw their savings tax-free. For the first four years of their existence, you were able to contribute a maximum of $5,000 per year. On January 1, 2013, the annual contribution limit went up to $5,500. Similar to how RRSPs work, any amount you do not contribute is carried over to future years. To open an account, you simply have to be 18 years of age or older. If you’ve been 18 since 2009, your total contribution limit is currently $36,500. TFSAs can be opened through most financial institutions, and are permitted to hold a wide range of investments, such as mutual funds, stocks and, of course, GICs.
What are the benefits of holding GICs in TFSAs?
There are three main benefits of holding guaranteed investment certificates in a TFSA. First, your money grows tax-free (meaning interest earned and capital gains are not taxed). Second, unlike RRSPs, your withdrawals are also tax-free; this makes them stand out amongst all investment options, as tax seems to be attached to everything else. Finally, because it’s in a GIC, your principal is guaranteed; this makes it a fairly safe investment, which might be perfect for a first-time investor or someone who’s uncomfortable taking on too much risk.
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