The tax-free savings account (TFSA) lets you store your extra money and assets, safely and securely. It also works as a great emergency fund. It can help you get through the financial costs of unexpected events life throws your way (i.e. a global pandemic). To summarize, a TFSA account lets you save up money without paying any tax on the growth within the account or on withdrawals.
We have listed facts to help you work through some of the most common misunderstandings about the tax-free savings account to help you determine fact from myth:
1. It Can Hold Other Assets Other Than Your Savings.
Although it has the word ‘savings’ in its name, it can hold just about anything when it comes to finances. Almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into your TFSA. This could include bonds, stocks, mutual funds, exchange-traded funds and so on.
2. You Can Re-Contribute Your TFSA Withdrawals — But Not Until The Next Year.
When the TFSA was first established, there were many stories about Canadians accidentally over-contributing. Due to these over-contributions, they faced penalties from the Canada Revenue Agency (CRA). However, most of these resulted from a simple misunderstanding.
Some early owners used the TFSA like a conventional savings account, making frequent withdrawals and deposits. If the total of all deposits exceeded the annual limit of the account, it resulted in over-contribution.
Simply put, each time you deposit funds it counts as a contribution. That’s regardless of the total amount in the account. And what if you moved a TFSA from one financial institution to another by withdrawing and then re-depositing? Then you may trigger an accidental over-contribution. Making a transfer avoids that problem.
So what can one do to avoid over-contributing to their account? Don’t make more deposits in a calendar year than the annual limit, which is $6,000 in 2020.
3. You Can’t Lose Your TFSA Contribution Room.
If it’s your first time opening a TFSA today, you can contribute up to $75,000. Note you’ll need to have been over 18 years of age since 2009. You never lose a contribution room, regardless of your age. (Unless you’re a non-resident of Canada for an entire year, during which time you won’t have a contribution room).
4. You Can Use It As An Emergency Fund.
You can use a TFSA for your existing savings, even if they’re relatively modest. As long as you don’t lock the funds into a non-redeemable investment such as a guaranteed investment certificate that can only be redeemed upon maturity, you can access the money at any time. This also makes a TFSA perfect to use as an emergency fund. You’ll have the security of knowing the money will be available if you need it.
5. You Don’t Have To Choose Between A TFSA And An RRSP.
There are many clever ways to make the TFSA and RRSP work together to improve your wealth. As a general rule, RRSPs are a good choice for longer-term goals such as retirement. But TFSAs work better for more immediate objectives, such as a house down payment. A TFSA is also a good place to save if you have reached your RRSP contribution limit.
As you’re looking for ways to save more of your money through a tax-free savings account, having a credit card plan that suits your needs is another way to reach your financial goals.