What are your life dreams? Whether you want to buy a new car, go to university, travel the world, save for retirement or renovate your home, having financial flexibility can help get you there. And the Tax-Free Savings Account (TFSA) can be your missing ticket.
Here’s how to make sense of this mystery account, and six reasons why you would open a TFSA.
1. You’re ready to start investing more
Think of a TFSA more like an investment account than just your standard savings account.
The difference? When you put money into your TFSA, you’ll actually be investing in things like mutual funds and stocks, and that money can grow. Usually, when you make money on your investments, you’d have to pay income tax on your investment gains, but with a TFSA that’s not the case. It’s completely tax-free — no catch — so you can grow your money faster.
Any Canadian over 18 can open a TFSA, and every year you can add a certain amount to that account. This year, you can add $5,500 according to government rules. So there’s plenty of potential to earn more on your investments.
2. You’ve maxed out your RRSP
Your RRSP also has a contribution limit, and once you’ve maxed out, you’ll need to decide where best to invest your money. Keep in mind that even though an RRSP is tax-deductible, you’ll eventually be taxed on that investment when you withdraw the money or retire.
On the flipside, your TFSA contributions are not tax-deductible, but the funds will grow in a tax-free environment. So this is a great way to supplement your RRSP. A TFSA will allow you to increase your wealth without worrying about being taxed on that growth.
Not sure of the difference between an RRSP and TFSA? No problem — check out this quick article.
3. You wish your savings account could grow faster
Savings accounts these days don’t earn you much interest, so why not put savings into an account that can grow faster?
With a TFSA, you get that flexible savings account. This can be a low-risk way to save while also working towards your personal financial goals — short or long-term. As opposed to a traditional savings account with relatively low-interest rates, there’s potential to earn more return on your investment.
4. You want to take a special vacation
A TFSA can also be used to earmark funds for a rainy day.
The great thing is that you can have multiple TFSAs, and each could be used with a different goal in mind. For example, you could set up a second account that is earmarked to save up for a winter getaway. Or you might want to set up another account strictly to save (invest) money that can be used for a kitchen renovation.
Whatever you decide, you can match each goal with each TFSA. Just make sure you don’t go over the total allowable limit set by the government…
5. You have extra money… and don’t know what to do with it
That’s a great problem to have.
With a TFSA, you’ve got a lot of room to grow, and that extra money can go a long way. If you were at least 18 when the TFSA was introduced in 2009, you’d now have up to $57,500 for your contribution limit. Every year, that total will increase, so you can keep adding more to your account.
If you don’t use up the whole amount each year, don’t worry — that will carry forward to the next year. And as a first-time investor into a TFSA, you could potentially add up to $57,500 in 2018.
6. You want to make withdrawals freely — without penalty
Some investment accounts penalize you if you take your money out early. That’s not the case with a TFSA.
Instead, when it’s time to withdraw the funds, the growth coming out of the account is tax-free. The funds are not considered income and they won’t trigger any government benefit clawback. You can take out funds whenever you like, so you’re never locked in.
The Tax-Free Savings Account provides numerous benefits for members trying to save. It’s always best to sit down with a representative to find out how this account can work best for you.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. Mutual funds are offered through Credential Asset Management Inc.