Last month I talked about the
Introduced back in 2009, many Canadians have come to love their TFSA, but for some people, the rules that come with this account can be confusing. Generally speaking, TFSAs are easier to understand compared to an RRSP, but that doesn’t mean it’s necessarily better. It’s essential to know the rules for both accounts so you can use them effectively.
If you’re new to TFSAs, here’s what you need to know:
TFSAs are available to Canadians who are 18 or older. The amount of contribution room you have available depends on the year you were born. As mentioned, TFSAs were created in 2009, so if you turned 18 that year, you’d have a total contribution limit of $69,500 as of 2020. If you weren’t 18 at the time, you’d have to
If you log in to the
One big misconception about Tax-Free Savings Accounts is that you can only invest in a savings account. This isn’t a surprise considering the name, but it’s still deceiving. While you can certainly put your money in a high-interest savings account within your TFSA, you can also
If you earn $50,000 or less, investing in your TFSA over your RRSP may be a good choice. The reason you’d want to do this is that you don’t get much of a tax benefit if you invest in your RRSP when you’re in a lower tax bracket. You might be better off saving those contributions for when you earn a higher income. If you’re saving for a major purchase in the short term such as a home, car or vacation, a TFSA is a great place to park your money since you won’t pay taxes on any interest earned. TFSAs are also great for people who have maxed out their RRSP since it’s another savings vehicle that has tax benefits.
Unlike RRSP contributions, you won’t get a tax break when you put money inside your TFSA. However, any gains you make within your TFSA are
With your TFSA, you can withdraw money at any time, but that money can’t be re-contributed until the following year. For example, let’s say you contributed the limit of $6,000 this year and then you decided to withdraw $4,000 a few months later. You wouldn’t be able to re-contribute that $4,000 until the following calendar year. The only exception to this rule would be if you had contribution room leftover from the previous years, but each contribution would be cumulative. In this case, you would have made a total deposit of $10,000 for the year ($6,000 + $4,000).
TFSAs really aren’t that tricky. Some people prefer them over RRSPs but I like to look at them as complementing vehicles that can help Canadians save money. If you understand the basics of both, you can use them to your advantage.
Make sure you budget for home and auto insurance –
Barry Choi is a paid spokesperson of Sonnet Insurance.