What are you doing with your TFSA?
SETTING UP AUTOMATIC MONTHLY CONTRIBUTIONS IS THE BEST WAY TO ENSURE YOUR TFSA IS FULLY FUNDED
Regina Sy, a Crew Chief with Canadian Music Week recently started getting stable hours where t he i ncome was predictable. Recognizing that her Tax- Free Savings Account ( TFSA) was an option over RRSPs and GICs, she started to make contributions.
“I like how I can withdraw my money pretty quickly” she says. “I’m hoping to use it for travel and for big purchases in the future.”
Sy admits that she doesn’t use her TFSA effectively, and could always l earn more about personal finances in general. But she’s hoping to change that by maxing out her contribution limit every year moving forward.
TFSAs were introduced in 2009. I f you were 18 and lived in Canada at the time, you would currentl y have a cumulative TFSA contribution room of $ 52,000. How you use your TFSA really depends on your circumstances.
“I think paying off debt should t ake priority before opening a TFSA” says Markus Muhs, an Investment Advisor in Edmonton. “At that point, you’ ll want to make sure you have an emergency fund i n place and t hat’s when a TFSA would be useful.”
If you do plan on using your TFSA for short- term savings, look for an account that charges no fees, has no fixed terms, and no minimum deposits such as the President’s Choice Financial ® Tax Free Savings Account. You’ll get a competitive interest rate and every dollar of interest earned is tax- free. In addition, you can take advantage of promotional rates offered from time to time.
“A TFSA of course has many other uses and ideal- ly is used for longer- term investing, but even if someone’s just starting out, a TFSA is useful” says Muhs.
Deb Cheng, a teacher from Toronto has been maxing out her contributions since 2009. Recently engaged, she now uses her TFSA for various priorities.
“I mainly use my TFSA for more long- term personal savings” says Cheng. “I also plan to use it towards a down payment later on and for some travel expenses.”
Cheng usually maxes out her contributions at the start of the New Year so she can forget about the account for the rest of the year but feels that the rules aren’t always clear.
“I only recently found out that if you withdraw the full amount plus interest from your TFSA, you could r e- contribute t he s ame amount withdrawn t he following year in addition to the contribution amount allowed for the new year” she says.
Excited about the introduction of the TFSA in 2009, Robb Engen, a personal finance blogger maxed out his contributions in the first three years.
“I invested in Canadian dividend stocks, which grew my $15,000 into $19,000” he says. I withdrew it all to topup the down payment on the house we built in 2011.”
Engen took a few years off from making contributions while prioritizing other expenses of a growing family, but recently started to set aside money again.
“I’ m putting $ 1 , 000 per month in- to my TFSA to makeup for lost time” he says. The plan is to max out my TFSA, plus catch up on those lost years, by contributing at least $ 5,500 per year for the foreseeable future.”
Not everyone will be able to max out their contributions every year, but you should open up a TFSA since any gains made are completely tax free. Setting up automatic monthly contributions is the best way to ensure your TFSA is fully funded. However, you don’t need to rush the process.
“Don’t feel pressured to open one right away if you have other liabilities, or if you’re only saving in your RRSP for now” says Muhs. “Your lifetime contribution limit grows each year, whether you use it or not.”
It doesn’t matter how much money you have saved, a TFSA is a useful tool that will help you build wealth.