With a more promising year in store than the last, you’re feeling more confident and are determined to boost your savings. That’s a great goal, and the tax-free savings account (TFSA) could be the perfect way to help you achieve it.
Since a TFSA allows you to build tax-free savings, it’s the perfect investment vehicle to grow the money you’re putting aside for your medium- or long-term goals. Whether you want to buy a home, build an emergency fund for unexpected expenses or save for retirement, a TFSA can help you achieve any financial goal.
Here are 5 important concepts that show how a TFSA can work for you.
1. A TFSA is tax-sheltered
A TFSA is an effective way to grow your investments while keeping them tax-free. The capital, interest and dividends that accumulate don’t have to be included on your annual tax return. And what’s more, any withdrawals are also tax-free.
Unlike the money you put in an RRSP, TFSA contributions aren’t deducted from taxable income and you don’t receive any tax slips.
2. You can dip into your TFSA whenever you want
That’s right! With a TFSA, you can withdraw money when you need it, with no tax impact. But you’ll need to make sure to choose investments you can access at any time.
And as with anything, moderation is key. If you make too many withdrawals, your funds don’t have room to grow.
3. Your TFSA can help you buy a home
You can always use the savings you’ve accumulated to achieve your home-buying dreams. For easy access to your funds, be sure to choose your investments carefully.
If this is your first home and you’re planning to make this major purchase within the next few years, you might want to use the following strategy:
- Contribute as much as you can to your TFSA
- If you have enough RRSP room, take money out of your TFSA to contribute to your RRSP and reduce your taxable income
- Withdraw up to $35,000 from your RRSP, tax-free, under the Home Buyers’ Plan (HBP), and use that money as a down payment
- Pay back the amount you took out of your RRSP over 15 years, interest-free
4. No minimum investment required
You cannot contribute more than your TFSA annual contribution limit, which has accumulated since 2009 or since you turned 18, but there’s no minimum amount to contribute. You could use automatic transfers to invest small sums regularly, which will grow over time thanks to the tax-free income generated.
5. TFSAs and RRSPs: the perfect pair
There are many factors (age, income, objectives, goals, family situation) to consider when choosing between a TFSA and an RRSP.
These 2 tax-saving tools complement one another, but you should generally choose an RRSP if it’s most important to build retirement savings. On the other hand, a TFSA is the best choice if you want access to your money to achieve medium- or long-term goals.
A TFSA could be right for you in any of the following scenarios:
- You anticipate stable or lower income in the coming years.
- You’re already contributing to your employer’s pension plan.
- You’ve maxed out your RRSP.
- You want to save for something special over the next few years.
Also good to know
- You must be at least 18 years of age and a resident of Canada.
- If you’ve never contributed to a TFSA since it was created in 2009 and you were age 18 or older in 2009, your contribution room in 2021 is $75,500.
- Any money you withdraw in one year will be added back to your contribution room for the following year.