So you’ve cut some expenses and what to start saving for an emergency. But where should you put it? A TFSA! So let’s get into what exactly a TFSA is, and how it can help you with your savings goals.
What is it?
A common misconception about Tax-Free Savings Accounts (TFSA’s) that I found hard to grasp at first is that they are not a special account. Instead, they are more of a wrapper that you put an account into.
It is done by the Canadian federal government and has many different purposes.
There are some advantages to changing an account to a TFSA, as well as some disadvantages.
As anyone who has been following my financial updates knows that I have a TFSA. It doesn’t have much in it, approximately $0.78 as of the time of this post. But this wasn’t always the case. So why did I get one? What advantages did it have over, say, an RRSP?
I have constructed this handy table here to help explain the advantages and disadvantages, and I’ll go more in-depth into each one.
|Contribution limit carries over year-to-year||Pay taxes on contributions||Static contribution limit|
|Calculates from the year you turn 18||Don't pay taxes on withdrawals||Must wait one year to reimburse withdrawals|
|Can put many types of accounts inside a TFSA||Only been in place since 2009|
|Only taxed growth after death period to beneficiaries|
The first advantage is that the contribution limits for TFSA’s carry over year-to-year. Meaning that if you have a $5,500 contribution limit this year, and had a $5,500 contribution limit last year, you’ll have a total of $11,000 of contribution limit.
Another advantage is ha this contribution limit begins the year you turn 18, whether you open a TFSA or not. If you want to know how much contribution room you have you can log into your MyCRA account, or, if you’ve never had a TFSA you can calculate your contribution using these previous contribution limits.
The third and probably largest advantage is that you can put multiple types of accounts under the TFSA banner. This can range from savings accounts to certain stock options. If you are looking for using the TFSA as a place to store your emergency fund, as I was, I would consider a savings account with your financial institution so that, in a pinch, you can transfer the money right away.
The fourth advantage of a TFSA is that, upon your death, your beneficiaries only pay tax on the amount of interest earned in the TFSA since your death. This usually means you will leave them a larger sum of money than a traditional RRSP or just cash.
In a perfect world, I would be able to give you a specific list of when a TFSA is better than a traditional RRSP or cash reserves, but as with everything it isn’t that black and white. Many of the aspects of a TFSA will depend on your intended use for it.
The first situational aspect to take into account is that you pay taxes on any money that goes int the account. This is how you are able to withdraw it at any time without paying taxes. For something like an emergency fund, this is perfect. But for something like a retirement account, where you would rather pay tax on the withdrawal, this isn’t exactly ideal.
The second situational thing to note is that TFSA’s have only existed since 2009. For someone like me that was 15 in 2009, this isn’t a big deal. However, for an older person who was alive before 2009, this may feel like somewhat of a wasted effort.
Finally, there are a couple of disadvantages to going with TFSA’s.
The first of these is that there is a static limit. A rather low static limit. Whether you make $1 Million this year or $1, for 2018 the contribution limit is $5,500. This can hinder the higher earners a fair bit, especially if you choose to put stocks or other high-cost investments into a TFSA.
The second disadvantage is that you have to wait a full calendar year after withdrawing from a TFSA to recontribute those funds if you don’t want it to apply to your contribution limit. This means that if you withdraw $3,000 to pay for some major car repairs and then want to pay it back on your next paycheque you’ll only be able to deposit $2,500 and will have to wait until January 1 the following year to deposit the remaining amount.
Overall the TFSA is great for the purpose it was designed for, allowing tax-free growth of a smaller amount of money, such as an emergency fund. However, for retirement accounts or accounts for large investments, there are better options in the Canadian market.
If you need more in-depth information or have a specific website you can check out the Government of Canada’s official website here. Or reach out to me and I’ll do my best to help!
How to open a TFSA account
So after reading this, you have decided that a TFSA is exactly what you’re looking for. But where do you get one?
Luckily TFSA’s are pretty easy to set up, with most major banks and credit unions offering TFSA savings accounts. Below is a list of the top interest rates for financial institutions offering TFSA’s. The “1st-year return” rate is based on an initial $5,000 deposit.
Get started on setting up your TFSA and check back next week as I discuss RRSP’s and start a new series on Friday! See you then!