Canadian savings plans such as RRSPs and TFSAs are designed to give Canadians a safe low-risk investment to ensure a comfortable retirement. It is important to start a savings plan as early as possible to ensure a comfortable retirement. However, it is important to be aware there are ways you can incur investment penalties on Canadian Savings Plan. It is essential to avoid these penalties so you prevent spending excess money on your investments. Below are a few tips on how to avoid investment penalties on Canadian Savings Plans.

Avoid a Penalty Tax for over-contributing to your Tax Free Savings Account (TFSA)

If you have an extra TFSA amount in your account in any month, you will be taxed 1 per cent on your highest excess TFSA amount. This tax is applied on a pro-rated basis for each month you have an excess amount in the account until your account limit has been increased or the excess amount has been removed. It is important to be aware of your contribution limit so you do not end up with an excess amount resulting in a penalty tax. The annual contribution limit for a TFSA is $5,000 per person, per year. In addition, if you frequently withdraw and deposit money from your TFSA in the same year, you may use up the allowed maximum contribution amount resulting in a penalty.

Since there has been some confusion regarding TFSA penalties recently, the Canada Revenue Agency (CRA) has said if a person receives a TFSA over-contribution letter, he or she can ask the CRA to review the file to see if it may be appropriate to waive the penalty tax. If you have received a letter, you have 60 days to respond. To make sure you avoid TFSA over contribution in the future, when transferring your funds, make sure you transfer your funds from one TFSA to another through a direct transfer between banks as it is not considered a TFSA contribution and withdrawal so you will not receive a penalty tax.

Do Not Cash out a Guaranteed Investment Certificate (GIC) Early

If you cash out a Guaranteed Investment Certificate (GIC) early, you will pay a penalty. In most cases, the financial institution will take the penalty from the interest you have accrued. Review your GIC agreement to check for circumstances where you could receive a penalty. The reason you are charged a penalty is you have actually broken the GIC contract you signed with your bank.

Do not use your RRSP before you Retire

It can be quite expensive taking money out of your RRSP account before retirement because withholding taxes will normally be applied. Withholding taxes is how the Government applies its penalty because its position is you should keep it where it is.

It is essential every Canadian invest in their retirement. When you stop working, you will need your investments, pensions, and savings to live comfortably. Start a retirement investing plan early and avoid the penalties. You will be happy you did when it is time to retire.

Consolidated Credit Counselling Services of Canada, Inc. teaches consumers how to budget, get out of debt, and use credit wisely. Offers a variety of unbiased debt management services and alternatives to help people get their debts under control.

Consolidated Credit Counseling Services of Canada, Inc. teaches consumers how to budget, get out of debt, and use credit wisely. Offers a variety of unbiased debt-counselling services and alternatives to help people get their debts under control.
http://www.consolidatedcredit.ca

Author Bio: Consolidated Credit Counselling Services of Canada, Inc. teaches consumers how to budget, get out of debt, and use credit wisely. Offers a variety of unbiased debt management services and alternatives to help people get their debts under control.

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