The Tax-Free Savings Account (TFSA) is an essential account that every Canadian need, regardless of their age, income, or financial goals. There are many reasons that prove that a TFSA is not just another savings account, but is rather one of the best kinds of savings account out there since it was introduced to Canadian banks in 2009! The TFSA can be an amazing investment vehicle, deposits and withdrawals anytime you want and all management fees (if you’re investing) are tax-free as well. The TFSA is a low-maintenance account that you can customize for saving or for growing. This blog will cover the benefits of the TFSA, giving you the top 7 reasons why every Canadian should have a Tax-Free Savings Account (TFSA).
Reason 1: Tax-Free savings to maximize growth
The Tax-Free Savings Account (TFSA) is a great way to maximize the growth of your savings. Many savings accounts have fees associated with them, there are taxes added to those fees as well which just means that even though there might be interest earned on your savings, there are taxes that need to be paid. These savings accounts are not the best way to maximize your growth in terms of interest, mutual funds, stocks, capital gains, bonds, or ETFs. Rather the best way for you to maximize your savings is by minimizing your taxes. Luckily with the Tax-Free Savings Account (TFSA), banks cannot charge tax on any management fees or the income earned with any interest, mutual funds, stocks, capital gains, bonds, or ETFs also is not taxable income. This account is legitimately a Tax-free and tax-sheltered account which will minimize the fees associated with it.
Reason 2: Your contribution room grows every year
The contribution room in your TFSA grows every year which means the government allows a certain contribution amount to be deposited into your TFSA every year. If you are someone who is already actively contributing to your TFSA then this is beneficial because you can add more money year to year to your TFSA. If you are someone who still hasn’t opened a TFSA this is even better news, this means that your cumulative contribution room could be extremely high, and completely tax-free. What this means is that since its creation in 2009, the Tax-Free Savings Account (TFSA) contribution room is in line with the age that you turned 18 years old, so if you were 18 years old or over in 2009 then you currently have a cumulative total of $81,500 in contribution room in your TFSA.
Some years allow for higher contributions than others, but either way, this contribution room is a wonderful aspect to consider when opening a TFSA. To find out your contribution room, find out the year that you turned 18, and add up the amount of contribution room per year from that year. For example, if you turned 18 in 2015, then you just add up the annual contribution limit per year from 2015 onward. Therefore, if you turned 18 years old in 2015 then your cumulative total contribution limit is $50,500
Below you can find the table of how much the government has allowed as contribution room per year since the inception of the TFSA:
Reason 3: Access your money anytime
Many savings accounts such as the LIRA (Locked-in retirement account) and the RRSP (Registered retirement savings plan) are savings accounts that have some penalties and conditions if you withdraw from them. With a TFSA, you don’t need to worry about any penalties or conditions when you withdraw your money. The only thing to keep in mind is if you have reached your total contribution limit then you can’t deposit that money back in until the next year. This is a minor complication but this isn’t as impactful as some of the complications when withdrawing from an RRSP.
The money in your TFSA is yours and you are totally free to access it whenever you want. This makes the TFSA a great emergency savings account or rainy day fund. When accessing your TFSA remember to ask your bank what their policies regarding their TFSA account is. Although they won’t charge you for withdrawing from your TFSA, there are fees such as management fees, or possible losses from investments.