The Essential Facts for TFSAs
TFSAs, also known as tax free savings accounts, are a type of savings account available in Canada. They can be a useful tool to help you reach your savings goals. For anyone still trying to seriously save using a conventional savings account, I’d strongly encourage you to look into switching to a TFSA. In this RateSense.ca post, I give you the essential TFSA rundown for these often underrated savings methods.
1. The Rules
While I can’t deny the many benefits and flexibilities that TFSAs offer, it’s not a catch-all solution for just anyone. Indeed, there do exist some pre-existing requirements which need to be met in order to be eligible to open one of these bank accounts. You need to be a minimum of 18 years old to open an account. This means minors are not eligible to be the holder of any TFSA. Likewise, these tax-free accounts are only available to Canadian residents. There’s a limit to the amount you can contribute annually, too. Each year provides an additional $5,500 of contribution room, and any unused contributions are carried forward to the subsequent year.
2. Contributions, Withdrawals, Oh My!
Continuing from the last point, I wanted to go into more detail about how contributions and withdrawals on TFSAs work. As mentioned, each year allows an additional $5,500 of contributions. It is possible to contribute over this amount, but the interest earned on the amount over the limit is taxable. Having your interest taxed takes the “TF” out of TFSA, so keep an eye on your contributions! Another point worth noting is that withdrawing from your TFSA doesn’t impact your contribution limit. If you had $1,000 of contribution room left for a year, and withdrew $500, you will still have $1,000 left to contribute (not $1,500)!
3. TFSA Withdrawals are A-OK
Speaking of withdrawals, you might think that these are bad for TFSAs, but you’d be wrong. Unlike RRSPs, another popular savings solution, you’re not going to incur any penalties for drawing on your TFSA. This makes it a great savings tool for short and long term goals, or for such things as a vacation or emergency fund where you may occasionally need to dip in. As long as the contribution limit is being accounted for when withdrawing funds, there is no problem! The reason for this, is because unlike RRSPs the money you put in a TFSA is post-tax income. RRSP contributions, on the other hand, are pre-tax income; it’s usually deducted “at source”, so you never see it until withdrawing from the RRSP. It’s at withdrawal time that the tax is charged for these accounts.
4. Not Your Run-of-the-Mill Bank Account
Unlike a traditional savings account, a TFSA is a special type of investment, meaning there are many possibilities for you to invest and maximize on returns! A TFSA can be used with GICs, mutual funds, stocks, and other investment tools. What’s more, all the interest earned on these investments is earned tax free! There’s a catch though, if you want to cash in on the tax-free gravy train. Just make sure to reinvest the interest earned on any TFSA investments to keep earning interest tax-free.
5. Have as Many as You Like
Contrary to what you might think, there’s no penalty or problem with having multiple TFSAs with several institutions. The key here, is to respect your annual contribution limit, as the $5,500 limit is across all accounts registered in your name. For many people, one TFSA is more than enough, but depending on what your goals are it might make sense to open more than one. The various Canadian banks often offer promotional rates on new TFSA sign-ups. These offers can sometimes triple the interest you’d normally be earning, so it might be worth checking out. I have friends who have separate TFSAs for separate goals. One might be a new car fund, while another is to save for a down payment. The flexibility of the TFSA means you can use it for anything you might want to save for, be it short or long term!
So, there you have it — the essential pulse on TFSAs. In my opinion, it’s a great tool for putting away money and saving up for financial goals. I’m currently using mine to save up for a much-needed vacation…destination undecided as of yet!
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