One of the most interesting options that Canadians have when it comes to saving money is the Tax-Free Savings Account (TFSA). This account provides you with the opportunity to set money aside in a flexible investment account, allowing your contributions to grow tax-free.
The TFSA provides you with a way to boost your savings, since you don’t have to worry about paying taxes on your earnings, whether it’s the interest from GICs, dividends, or capital gains. Your money grows faster, and you have access to it anytime you want. Indeed, the TFSA is practically a no-brainer.
Eligibility and Contributions
If you are a Canadian resident, and 18 or older, and you have a Social Insurance Number, you can open a TFSA. You do have to abide by rules regarding age of majority in your province, so you might have to wait until you are 19 to open your TFSA in certain provinces. However, it is worth noting that your contribution room is carried from the time you are 18, so you can begin catching up as soon as you open your TFSA.
Right now, the annual contribution limit is $5,000 a year. However, contribution room carries forward indefinitely. So, if you only contribute $4,000 this year, you still have $1,000 of contribution room for future years. You could actually contribute $6,000 next year, or you could contribute $5,500 next year, and $5,500 the year after. Your contribution room builds on itself as well, so you are allowed to take full advantage of the TFSA.
It’s also worth noting that your contribution room is affected by withdrawals, which you can make at any time, and for any reason. If you contribute $5,000 to your TFSA in January of this year, but withdraw $1,500 in June, that counts as contribution room. So, next year, you will be able to contribute up to $6,500.
There are no income requirements or restrictions to making your contributions. You don’t need earned income to contribute to a TFSA, and you aren’t restricted by being a high-income earner. Additionally, contribution limits are expected to rise over time with inflation, so keep up with your contribution room (the government helps by sending you a report with how much room you have).
There are a number of investment options when it comes to your TFSA. Indeed, most “regular” assets can be held in a TFSA, including:
- Savings accounts
- Mutual funds (including index funds)
- Segregated funds
- Individual equities (including dividend paying stocks)
There are other options as well, but many Canadians are likely to be most comfortable with the options listed above. In any case, it’s fairly clear that you have a number of options for your TFSA. What you decide depends on your risk tolerance. It’s possible to use your TFSA as a sort of investment portfolio, mixing different types of assets in your TFSA to create the returns that will help you reach your goals.
Over time, the savings from the TFSA are magnified, since you can receive the possibility of a higher return from the investments you choose, plus you have the tax advantage. Since you won’t have to pay taxes on your earnings, you will have a greater advantage over time.