Great things you can do with your TFSA
A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think. I know – I’ve been using a self-directed Tax-Free Savings Account for years with great success. On that note, I’ve never really been a fan of the account name as it barely scratches the surface of defining this account type.
Since this account was introduced in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. While the TFSA is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.
As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. You can carry forward any unused contributions from year to year. There is no lifetime contribution limit.
For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!
How good is that?!
Here is summary of many great TFSA benefits:
- Capital gains and other investment income earned inside the account are not taxed.
- Withdrawals from the account are tax-free.
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits.
- Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
- While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA.
- TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death.
- The annual contribution limit is indexed to inflation in $500 increments.
- And much more!
Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:
Conceivably by now, some couples might be well over $200,000 in combined invested assets thanks to TFSA assets held and grown inside this powerful account over the last decade.
So, if you haven’t already thought about it, here are some of my favourite ways I tell readers they can save and invest with a TFSA.
- Save for your kids’ education
If you’ve already saved for kids’ education using a Registered Education Savings Plan (RESP) then you should know your TFSA is a great place to save more for your kids’ education. As you know from my list above, you’ll have zero taxes on the growth within the plan and there will be no tax consequences with this account if your children choose not to go to college or university – like the RESP has.
When your kids become adults, encourage them to open a TFSA in their own name. This way they can start saving and investing tax-free as long and as much as possible.
- Save for your short-term goals
Want to travel?
Want to fund some improvements to the house without going into debt?
Do it with tax-free money using your TFSA to park savings for shorter-term expenses.
- Fund your retirement
This is my personal favourite!
My wife and I have been diligently using the TFSA contribution room as a secondary retirement account along with our RRSP – since TFSA Day 1.
Although we’re not ready to retire yet, the TFSA is helping us get there. Contributions to the TFSA make for a great retirement account due to the types of investments you can hold inside this account. It’s far more powerful than just a cash or high interest savings account.
What you can put in your self-directed TFSA:
- Exchange Traded Funds (ETFs) for low cost diversification among other benefits.
- Real Estate Investment Trusts (REITs), and by doing so, avoiding any messy tax implications.
Here are some options to consider when using the TFSA related to retirement:
- If you have already reached your RRSP contribution limit – you may use your TFSA to top up savings! One option you can consider is making RRSP contributions throughout the year and then using the RRSP-generated tax refund to contribute to your TFSA every spring. This way, you can grow both accounts over time! Check out the self-directed online investing accounts you can own to do this seamlessly here. In doing so, you can take advantage of BMO’s special investing offers today!
- If you want to retire early, you may not be eligible to receive government or workplace pensions yet (until age 55 or age 60). You can consider using your TFSA assets to bridge the gap between now and when those income payments start.
- If you have already reached retirement age, and are drawing a government or workplace pension, consider contributing to a TFSA – so you can be more tax-efficient in retirement. For example, most of you know you can’t own an RRSP past the year you turn age 71. (You have to convert it to a Registered Retirement Income Fund (RRIF) or payout annuity by the end of the year you turn 71, or take the RRSP money in cash (and pay tax on it)). Regardless of your age – you can keep your TFSA open – and keep contributing to it. Take some monies withdrawn from your RRSP or RRIF each year and put that money to work tax-free inside your TFSA. This means you are converting tax-deferred money into tax-free money!
- Save for future costs
Who knows what the future holds. This means beyond a general savings account a TFSA can be a great way to invest (and grow) money tax-free for future needs. Say you have aging parents. If you’re not sure about their long-term healthcare costs, you can use your TFSA — or give your parents money to contribute to their TFSAs – to help cover future expenses.
- Save for your own rainy day
Bad things unfortunately happen to people from time to time. This means if you lose your job, your family income is compromised, or home emergency repairs are needed – TFSA assets can help you and your family overcomes any rainy day disaster with money already in the bank.
In closing, options abound when it comes to the TFSA for Canadians – these are just some of the many great things you can do with your TFSA in any year. No better time than the present!
Learn about this account and investing in more detail thanks to my partnership with BMO.
Take advantage of BMO’s special investing offers today and make sure you use my promo codes with My Own Advisor’s special offer when opening your BMO InvestorLine account.
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