Tax Free Savings Account -Go open one!!

[Reef Pilot]

Originally Posted by Reef_Geek

Bear with me here, I'm a bit slow.

Scenario 1. TFSA contribution room is $25.5K, and I put $20K into stocks under TFSA status. Got lucky and stocks now worth $45.5K.

1) My understanding is that I still have $5.5K of contribution allowed since I did not make use of it all to begin with. Correct? YES

2) My understanding is that, within the account, I can still churn the holdings without counting it against my contribution room. So for example, within the account total value of $45.5K, I can sell $5K of stock X, where the sales goes into cash holdings that stays within the account, and use that cash to buy $5K of stock Y, all without the government fining me for over-contribution. Is this correct? YES

Scenario 2. TFSA contribution room is $25.5K, and I put $20K into stocks under TFSA status. Got unlucky and stocks now worth $10K.

1) My understanding is that I still only have $5.5K of contribution allowed since I did not make use of it all to begin with. The depreciation of $10K in value does not add any incremental contribution room (ie doesn't mean I can add another $10K due to depreciation, just that if I actually sell and withdraw $10K, then I can re-use that room). Correct?YES

Basically, you are restricted to the annual limits for contributions from outside the TFSA. But you can grow (or lose) that amount with your investments, without any tax consequences. And whatever you take out you can replace (aside from your annual incremental contributions) tax free.

The only downside is that you don't get a tax deduction for contributions as in an RRSP. But you more than make that up (if you are a good trader) by not having to pay tax when you withdraw it, like you do with your RRSP.