4 Ways to Wrap Your Brain Around the TFSA Advantage in Canada
In a lot of ways, tax free savings accounts have become the optimal jumping off point for Canadians who want to kickstart their savings. Hey, it’s never too early to get started, and everyone likes the sound of tax-free, right?
It’s really fairly cut and dry. With a TFSA, Canadians can deposit an annual dollar limit ($5,500 in 2017). We can also contribute extra if we invested less than the maximum in the year previous. So, if you contributed $4,500 in 2016, you’ve got an extra $1,000 to invest this year.
The best part is you don’t have to pay taxes on the interest or any income you earn on your investment. Withdraw the money and you won’t be hit with a fee. Awesome, right? RRSP’s, on the other hand, are tax deductible.
So, you’ve got a TFSA secured and ready to go – now what?
1. Contribute Steadily
The most important tip is to contribute in small amounts over time. Instead of aiming for one large lump sum payment, set up an automatic transfer so you don’t have to think about it.
Some banks will let you do it online, but it’s probably a good idea to meet with an advisor. They can help you decide how much to contribute based on your budget and what your ultimate goal for the investment is.
Which brings us to…
What are you saving for? A vehicle? A house? A child’s education?
Clarifying what you’re going to spend your hard-saved money on brings focus into the mix. It’s a lot easier to watch your money move around when you know what it’s intended for. Sure, you might not have that cash immediately available at your fingertips, but that’s what saving is all about, right?
It’s just nice when we don’t have to think about it beyond that nice picture we’ve painted for ourselves in the back of our mind.
3. Research & Understand Versatility
One of the great things about TFSA’s is you can use them to purchase investments on your own. Be careful though! Any time you invest money you’re looking at some level of risk. That’s just the reality. If you’ve researched and thought through your purchases, then by all means use your TFSA to get into the market.
TFSA’s are flexible. How flexible? Well, aside from the different things they might be reserved for, like retirement or college or healthcare, you can direct your cash flow into various stocks you believe in. From oil and gas to technology to green energy and precious metals, a TFSA lets you navigate the market on your own terms.
Again though, be careful, and be informed.
4. Don’t Over-contribute
What happens if you over-contribute to your TFSA?
Well, for one thing don’t answer your door until you fix the situation.
Just kidding. No, the government won’t send hired goons to your house. You will, however, be docked a 1% monthly penalty against the excessive contributions. This rule is in place to keep us from taking advantage of the system. The TFSA is for everybody in Canada, and it should stay that way.
So keep track of your spending and your contributions, and soon you’ll be well on your way to enjoying the benefits of your personal tax free savings account!