A Quick Guide To The TFSA

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When it comes to investing your money, there are so many options that your head might start spinning. What is the best option for you? How can you make your money work for you? Do you even have enough money to save? It’s important to put away money for a rainy day, and tax-free savings accounts (TFSAs) may be a good investment choice for you.

What’s a TSFA?

A TFSA isn’t a specific savings account. Instead, it’s a general term for investments such as stocks and bonds. TSFAs can be opened by adults over the age of 18 who hold a valid social insurance number.

When did it start?

The TFSA program was launched in 2009 as a way to help individuals grow their savings while not paying tax on the earned interest. While TFSAs are not deductible for your income tax, they are accessible without penalty.

Should I open a TFSA?

Well, the short answer is: it depends. You could save your money for long-term goals like retirement, or you can work towards saving for short-term goals like a new car or vacation. Therefore, your investment type is heavily based on factors like risk tolerance, years until retirement, and your desired involvement in your portfolio.

What is the maximum contribution limit?

The maximum allowable contribution towards a TFSA changes every year, so you’ll want to check with your financial service provider for more details. For 2018, the maximum allowable contribution is $5,500, with a cumulative capital limit of $57,500. Basically, while there are no limits to how much your TFSAs are worth, there are limits to how much you can deposit into your account yearly.

What are the benefits?

Where do we start? TFSAs come with a ton of benefits. First and foremost, TFSAs allow you to boost your savings by investing your money into a high-interest, tax-free account. That way, you can grow your savings more quickly than in a traditional savings account. Additionally, you can withdraw your money at any time without penalty, and you’re free from the income tax on capital gains and dividends.

That’s where the term “tax-free savings account” comes from, and the benefits don’t stop there. As a retiree, your withdrawals from your TFSA aren’t considered income, so it won’t affect critical benefits like Old Age Security. To top things off, if you withdraw cash from your TFSA this year, the withdrawn amount rolls into the contribution limit for next year. So if you withdraw $4,000 this year, for example, you can contribute the next year in the amount of the normal maximum ($5,500) plus the additional $4,000.

How do withdrawals work?

While you can withdraw as much as you want from your TFSA without paying tax penalties, you need to watch out for the contribution limits. When you withdraw money from your TFSA and then try to put the money back during the same calendar year, your total contributions could end up exceeding the annual limit. If the contribution limit is exceeded, you’ll need to pay 1% monthly tax on the overage.

What are TFSA interest rates?

Interest rates vary on TFSAs, just like with any other account. As you likely know, different banks offer different interest rates. You’ll want to look around and shop the best rates from the major Canadian banks. From there, you can invest in your TFSA in the forms of your choice, including cash, government and corporate bonds, stocks, mutual funds, ETFs (exchange-traded funds), and GICs (guaranteed income certificates).

TFSA vs. RRSP

Now that you’ve learned about TFSAs, you may be wondering about other options you’ve heard of like RRSPs (registered retirement savings plans). When you contribute to an RRSP, your dividend and interest earnings are tax-deductible, which is the major benefit for this type of investment account. However, with an RRSP you are locking money away for retirement, and if you withdraw money early you’ll be hit with huge fees. Conversely, TFSAs allow you to access your money at any time without penalty.

On the other hand, RRSPs do have benefits that TFSAs don’t have, the major one being that you can’t deduct TFSA contributions on your income taxes — whereas you can deduct contributions made to RRSPs.

Read more: TFSA vs RRSP

Where can I get the best TFSA?

It depends on many factors, but once you find out what TFSAs are and how they work from the content above, you’ll have an easier time choosing the best TFSA for you. You can use CompareMyRates and easily compare the best TFSAs. You should also contact each TFSA provider and check their specific terms and conditions, and ask them what’s the best fit for you out of what they have to offer.

There are an incredible amount of investment strategies that you may employ, and the best strategy is to use many strategies. A TFSA may prove to be an important part of your portfolio, and the considerable amount of tax benefits make it a strategy worth considering.