Disclaimer: The TFSA only applies to those who live in Canada and are above the age of 18.
Taxes can take a hefty amount of money from your savings. Oh, not to mention, the compound impact over-time can also put some obstacles in your way of reaching your financial goals. This article is a bit different, instead of revolving solely on frugal, I’m going to inform you about the wonders of TFSA, so let’s begin!
Tax free anything sounds pretty sweet, right? Well, let me introduce you to the Tax-Free Savings Account (TFSA). In the simplest terms, the TFSA does not apply any taxes on contributions you make.
What is Considered Tax Free Then? What’s the Next Step?
There a lot of investment options you can choose from to make your income non-taxable. Here’s a few:
- Mutual funds
Opening a TFSA isn’t too difficult. As long as you meet the financial requirements, you can visit a bank and talk to an advisor to further discuss your TFSA plan. They can guide you and explain every detail in person. However, there are some important things to know.
Each year, the Government of Canada determines the amount of money that one can contribute to the TFSA. This is also known as the contribution room.
But what happens if you don’t contribute the maximum amount of money in the given year? Well, that amount is then pushed forward and added to the future contribution room in the upcoming years.
Benefits and What Else to Know
A lot of people might get carried away when they hear tax free, but there are some important things to know about the TFSA.
Don’t abuse the TFSA! Be smart about how you want to use your TFSA. If you plan to use it to buy some hot stocks on the market, think again. If the stock performs poorly, you can take unrecoverable losses when you use the TFSA in comparison to a taxable account. You also loose the potential of TFSA room.
Also, since the government decides the contribution limit each year, if you over-contribute, you can be hit with some fines and penalties, so always make sure you read the details. Now, to the benefits!
By now, you might see some of the benefits already. If not, let’s run through some together:
- Tax-Free Growth: You essentially pay no tax on the income you earn through your investments. Now that’s really awesome!
- Reaching your goals: The TFSA can be seen as a vehicle in reaching your financial goals, whether its short or long term.
- Retirement planning: If used correctly, the TFSA can work with your RRSP to help you when you are older.
Be Frugal, Be Smart!
Overall, the TFSA is one of the ways you can expand your capital. When you typically think of being frugal, you think ways of cutting money and using alternatives. While that’s fine, there are tools that can help you expand your money! Being smart about your financial choices is crucial.
For further information, check online with your respected banks to learn more about the TFSA. Or, if you have the time, book an appointment with a financial institution advisor to learn about your options.
Links to banks: