Opening a TIFF (Tax-Free Investment Fund) account can be a great way to invest and grow your money tax-free. A TIFF account allows your investments to grow tax-free, meaning you don’t pay tax on any investment income or growth as long as the money remains in the account. Here’s what you need to know about opening and managing a TIFF account.
What is a TIFF Account?
A Tax-Free Investment Fund (TIFF) account is a type of registered account that allows you to invest money and earn investment income tax-free. Some key things to know about TIFF accounts:
- Investment income and growth is tax-free as long as the money remains in the account
- Contributions are not tax deductible like other registered accounts
- Withdrawal of funds are tax-free (unlike RRSP/RRIF withdrawals which are taxed)
- Annual contribution room accumulates each year if not used
- Unused contribution room can be carried forward indefinitely
TIFF accounts are offered by most banks and investment firms in Canada. They function similarly to RRSP and TFSA accounts in that you open the account with a provider and then invest the money. The key difference is the tax-free earnings offered by the TIFF account.
Who is Eligible for a TIFF Account?
TIFF accounts are available to residents of Canada who have a valid social insurance number (SIN). You must be 18 years of age or older to open a TIFF account. Unlike RRSPs, there is no minimum earned income requirement.
Both individuals and couples can open TIFF accounts. Couples can have a joint TIFF account, or open individual ones. Trusts designated for the exclusive benefit of an individual with a SIN also qualify for TIFF accounts.
How Much Can You Contribute to a TIFF Account?
The annual TFSA contribution limit for 2023 is $6,500. This amount is indexed to inflation and increases periodically. Any unused contribution room can be carried forward and accumulated.
For example, if you turned 18 in 2020 and have never contributed to a TIFF before, your contribution limit would be:
Year | Annual Limit | Unused Room Carried Forward | Total Room |
2020 | $6,000 | $6,000 | $6,000 |
2021 | $6,100 | $6,000 | $12,100 |
2022 | $6,200 | $12,100 | $18,300 |
2023 | $6,500 | $18,300 | $24,800 |
As you can see, the contribution room accumulates each year and can be carried forward if you don’t maximize your contributions. There is no lifetime limit on the amount that can be contributed.
What is the Annual TFSA Limit for Couples?
For couples, the annual TFSA limit is still per individual. Each person can contribute up to their personal limit per year. For example, for a couple in 2023 the maximum combined contribution would be:
- Person 1: $6,500
- Person 2: $6,500
- Total: $13,000
It’s up to each couple how they want to divide up the contributions. One person could max out their limit, while the other contributes less or nothing at all. The only requirement is that total contributions per individual do not exceed that person’s limit.
What Can You Invest in With a TIFF Account?
A wide variety of investment options are permitted in TIFF accounts, giving you flexibility to build a portfolio aligned with your goals and risk tolerance. Here are some of the most common TIFF account investments:
- Stocks – Shares in publicly traded companies listed on stock markets.
- Bonds – Debt securities issued by governments and corporations.
- Mutual funds – Professionally managed portfolios investing in stocks, bonds and other securities.
- ETFs (exchange traded funds) – Funds that track stock market indexes or sectors.
- GICs (guaranteed investment certificates) – Low-risk investment certificates issued by financial institutions.
- Bank savings accounts – High interest savings accounts offered by banks.
Certain types of investments not permitted in TIFF accounts include crypto currencies, collectibles, and foreign or offshore investments. But overall, TIFF rules accommodate most typical investment options.
How to Open a TIFF Account
Opening a TIFF account is straightforward process. Follow these key steps:
- Choose a provider – TIFF accounts are offered by banks, investment firms, credit unions and insurance companies. Shop around for the best account terms and investment options.
- Fill out an application – Applications can often be completed online or in person at a branch. You’ll need your SIN and personal identification.
- Make your contribution – There is usually no minimum initial deposit. Contribute what you can up to your limit when opening the account.
- Select investments – Pick which investments, such as mutual funds, stocks or GICs, you want to hold in the account.
- Keep records – Track your contributions and maintain statements to understand your remaining room.
The entire application process may only take you a few minutes online or a quick visit to your local branch. It’s a simple way to start enjoying tax-free investment growth.
How to Manage Your TIFF Account
Managing your TIFF account just involves a few key aspects:
- Contribute regularly – To maximize the benefits, contribute as much as you can up to your limit each year.
- Invest appropriately – Choose your investment mix based on your goals, time horizon and risk tolerance.
- Track contributions – Monitor your deposits and understand your remaining room.
- Maintain a long-term view – Resist dipping into capital since withdrawals erase contribution room.
- Watch account growth – Review statements to see your investments growing tax-free over time.
Rebalancing your holdings occasionally to maintain your target asset allocation is also recommended. And explore whether to contribute to your partner’s TIFF account once you’ve maxed out your own. Simple habits create substantial tax-free wealth over decades.
Making Withdrawals from Your TIFF Account
One of the big benefits of TIFF accounts is that withdrawals of your capital or any investment income/growth is completely tax-free. Here are key points on making withdrawals:
- Withdrawals aren’t taxed or penalized in any way
- Your contribution room is reduced by the amount withdrawn for that tax year
- The next year your room will increase again by the annual limit
- It can take a few days to process withdrawals depending on investments
- Have a plan for using withdrawn funds since the tax benefit is lost
For example, say you contributed $5,000 to your TIFF this year which has a limit of $6,000. If you withdraw $3,000, your remaining room for the year would be reduced to $3,000. Next tax year it would increase again by the full limit.
Tips for Maximizing TIFF Accounts
Here are some tips for getting the most benefit from your Tax-Free Investment Fund account:
- Start early and contribute often – Time and compounding growth magnify the tax benefit
- Don’t withdraw unless truly needed – Preserve that tax-free status for as long as possible
- Invest based on your timeline – Match investments to your goals, not vice versa
- Delay OAS/CPP to bump limit – Higher benefits can support greater TIFF contributions
- Contribute windfalls and bonuses – directing sporadic income into your TIFF is smart
- Max it out before RRSP – The tax-free compounding is more advantageous
Stay disciplined, be patient and maximize your annual contribution limits. Over decades, the tax-free compounding and growth can create substantial wealth for retirement or other priorities.
Converting Your RRSP to a TIFF
It is possible to convert some or all of your RRSP savings to a TIFF account. Here’s how it works:
- Withdrawals from RRSP are taxed as income
- You can choose to deposit part or all of the RRSP withdrawal into the TIFF account
- Deposits to TIFF cannot exceed your available contribution room
- Converted assets continue growing tax-free in the TIFF account
Converting RRSP to TIFF makes sense if you expect to be in a higher tax bracket in retirement or want to unlock more flexibility. But consult a tax advisor first and do calculations to determine if it aligns with your financial plan.
Alternative Accounts to a TIFF
A TIFF account isn’t your only option for tax-advantaged investing and savings. Two other popular accounts include:
RRSP
- Tax deductible contributions lower your taxable income
- Funds grow tax-deferred until withdrawals in retirement
- Withdrawals fully taxable as income
- Good option if expecting lower income in retirement
TFSA
- After-tax contributions aren’t tax deductible
- Investment income and growth is tax-free
- Withdrawals not taxed
- Flexible to withdraw and re-contribute
Many people use a combination of TIFF, RRSP and TFSA accounts to enjoy complementary tax benefits. Consult a financial planner to develop a balanced savings strategy.
Conclusion
Opening and using a Tax-Free Investment Fund account can provide you with an excellent way to grow your savings and investments tax-free. While not quite as flexible as a TFSA, the TIFF provides the opportunity for unlimited tax-free growth over long time periods, making it a powerful retirement savings vehicle. Be sure to learn the TIFF rules thoroughly, choose the right investment products to match your goals, and maximize your contributions each and every year.