Understanding TFSA And How Does TFSA In USA Work

Understanding TFSA And How Does TFSA In USA Work
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What Does TFSA Mean?

Let’s decode the abbreviation first, TFSA stands for “Tax-Free Savings Account”. As obvious by the name itself, a TFSA gives you an opportunity to save taxes. As the famous line goes “there’s no free lunch”, TFSA also comes with some limitations. It does not imply that you can save all your taxes with TFSA. Let’s get a bit deeper into this.

TFSA is a dedicated program in which you can submit a portion of your income without paying any taxes. People who want to avail this plan should have an age bracket of 18 and above. Moreover, you need a SIN (Social Insurance Number) to claim TFSA.

The plan (TFSA) has its foundation in Canada, and it came up with the purpose to motivate Canadians to save their incomes. Any income earned (capital gains) under TFSA is also tax-free. Moreover, if you do not use the contribution space limit of TFSA, it adds up to the next year.

Is TFSA Subject to Money Contribution Limit?

The short and simple answer would be “yes”. Since the time it was introduced, it came with different limits to save your money each year. For the year 2022, TFSA has a limit of $6000. However, as mentioned before, if you don’t use your previous year’s annual space for TFSA, it will add up to the next year’s space.

Here’s a broad overview of different contribution limits over the time:

  • Year 2009-12: $5000
  • Year 2013-14: $5,500
  • Year 2015: $10,000
  • Year 2016-18: $5500
  • Year 2019-21: $6000
  • Year 2022: $6000

Is There a Difference Between TFSA & RRSP?

The answer is “yes”. RRSP is dedicated to the people who want to save money for retirement. However, in TFSA, you can save money for any purpose, it doesn’t have to include any specific purpose.

Any amount saved in TFSA isn’t taxable, meanwhile, the RRSP amount can be deducted in taxes.

Money Withdrawal & Calculate Contribution Space in TFSA

There are no detailed requirements while taking out your money from TFSA. Moreover, there are no specific date requirements about when money can be added and when it can be taken out.

Four Important points about money withdrawal from TFSA are listed here:

  1. No specific date is required for money withdrawal, you can take out your savings at any time.
  2. No withdrawal limit, you can take out all the money at once.
  3. If you have taken money from your account in 2021, your free space will be added in the year 2022.
  4. There’s no income tax on any TFSA withdrawal and you can spend your withdrawals on anything you want.

Let’s calculate your deposits in TFSA with a few easy steps.

Let’s suppose there’s a person John who regularly saves income in TFSA. In 2021, he wanted $15,000 to be taken out from TFSA. Moving on, in 2022, according to the 2022 yearly space in TFSA, John can submit $6,000.

However, his previous withdrawals have also been added up and this gave John a total space of $21,000 to submit into TFSA.

If John hasn’t submitted any deposits since 2009, he will be able to deposit $81,500 by 2022.

How does A TFSA in USA work?

TFSA is a Canadian program and doesn’t hold any significance for the people who are US citizens and are residents in Canada.

If you want to understand TFSA and its link with the IRS, you should take notice of the U.S.-Canada Tax Convention. The document does not mention any deductions for TFSA. Moreover, even the IRS does not include any specific considerations for TFSA.

Since the money saved in TFSA is taxable in America, a U.S. citizen who is a resident in Canada cannot get any special benefits given under TFSA.

How Do We report TFSA in the USA?

Since TFSA does not have any significance inside the USA and it’s a foreign financial account, you need to report it on FBAR. Foreign accounts are taken under great scrutiny. Failure to file the account can lead you to a trouble and there are some penalties as well which we have discussed in the coming section as well.

You may need to file these forms:

  • Your TFSA may be considered under foreign trust. To mention a foreign trust in the U.S. taxation process, you may need to file a Form 3520-A.
  • To obtain an automatic extension, you may need to file a form 7004.
  • Moreover, to report all your transactions in TFSA, you may need to file a Form 3520.  

We have also written a detailed guide about how IRS deals TFSA and different forms you need to file these taxes.

Since taxation is a complex process and requires interpreting your individual financial records and assessments, we recommend consulting a cross-border taxation expert in these matters. This can save you from huge penalties and you may need to pay fewer taxes as well.

Penalties for Not Filing TFSA in the U.S.

There can be several penalties based on your contextual financial records for not filing TFSA. However, we’ll go through some of the consequences in the context of the above-mentioned forms and regulations.

  • If you don’t file a Form 3520-A, you may be subjected to a $10,000 penalty. Additionally, you’ll be charged 5% on the amount you possess at the end of the closing taxation year.
  • If you don’t file a form 3520, this can subject you to a penalty of 35% of the amount you used during any transaction.

If you fail to file any of these forms, you may need help to be safe from a penalty. Get help today.

What Should I Do If I Have a TFSA Account in the USA?

Generally, it is always advisable you don’t keep your money in TFSA if you are an American taxpayer who is a resident of Canada as well.

This can save you from two situations:

  1. You won’t have to take the extra burden of filing different forms.
  2. If your TFSA space hasn’t been used, all your space can be added to the next year, and you can use that in the coming years.

Save Your TFSA Taxes & Pay Less.

With the right set of directions and paying close attention to all the details, you can save yourself from paying a lot of unnecessary taxes. At AkifCPA, we have maintained high professional standards over the years while filing your taxes and will make sure that you save your money as well.

Contact us, you are just a click away to save your money and time.

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