TFSAs the best way to sock away rainy day funds

Savings account can be used for an emergency fund or retirement if your RRSP room is gone

It’s a new year and that means you have a new Tax-Free Savings Account (TFSA) contribution limit. For 2018 it’s $5,500.

If you’re opening up a new TFSA, remember that you have to be 18 or older and that your contribution is not tax deductible.

Please, please make a beneficiary designation (everywhere in Canada except Quebec) on your TFSA to avoid probate costs should you kick the bucket.

The best thing about a TFSA is its flexibility. You can take money out of your TFSA at any time for any purpose without losing the contribution room. If you withdrew money last year you can put that money back now because the calendar clicked over.

It’s that flexibility that makes TFSAs my number one choice for socking away an emergency fund.

Let’s say your roof caves in, your car goes bump, your employer decides to chop back your hours so now you’ve got a cash flow problem.

Not with your emergency fund in your TFSA you don’t.

You can pull as much or as little as you need to keep your budget balanced. Then next year, not only will you be able to put in the normal contribution, you can put back any or all of the money you took out to make ends meet.

But emergency funds aren’t the only way to use TFSA.

Since neither the income earned nor withdrawals from a TFSA affect a body’s eligibility for federal income-tested benefits and credits, the TFSA is a great way for lowerincome Canadians to set something extra aside for retirement without having to worry about how it’ll impact their government benefits.

People who belong to company pension plans may not have much RRSP room but can still save a little something more for the future using a TFSA. People saving to buy a home will also love the TFSA since there’s no specified repayment plan or tax hit if you miss a repayment, and you can reuse the contribution room for something else once you’ve accomplished your home-buying dream.

Couples who want to income-split will love the TFSA because a higherincome spouse can contribute to the TFSA of a lower-income or stay-athome partner, without the income earned being attributable to the higher-income spouse.

The TFSA is also the perfect place to park that money you’re eventually going to use to buy a new car, repaint your house, or go on a splendid vacation . . . any kind of planned spending for a big-ticket item.

You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments. Why? Well since all the capital gains inside TFSA is tax free, it also means any capital loss can’t be claimed to be offset your other capital gains.

The big thing to watch for is the fees levied by financial institutions. Don’t be so blinded by the tax-free income that you buy your account from some provider who then gouges you with admin and withdrawal fees. They’ll try. It’s up to you to make sure they don’t succeed.