The TFSA is an amazing vehicle for savings and can be molded to suit people in various walks of life and at different times in their life. Many experts especially recommend the TFSA if you fall within the bracket of medium to low incomes. It would benefit you greatly and serve as a means to accumulate and grow wealth.
In this discussion, we are going to cover three categories of people:
- Those who are a decade away from retirement.
- Those who are a year away from retirement.
- Those who are under forty years of age.
A Decade Away from Retirement
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If you are a decade away from retirement and earn close to $80,000 per annum and already have an RRSP, stay there and use your annual tax refund to invest in your TFSA. This would act as making Government money do double-duty in a sense. Try to max out the yearly contribution of $5,000. This strategy gives you the best of both modes of investment and brings your taxes down. Having the TFSA in addition allows you a little more room for emergency withdrawals as you can avoid being taxed on these. If possible, leave the money in the TFSA or open two TFSAs within your contribution limit, earmarking one as “not to be touched” and the other, as a “just in case” fund. (Only in the most extreme cases when there is no other option, will you dip into your second TFSA.)
A Year Away from Retirement
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If you are only a year away from retirement, then the TFSA is the way to go. Some people might think this is too late to start but that is so far from the truth; it is among the best times to start! It doesn’t make sense to keep depositing money into a fund that you will soon be emptying out. (RRSP) The TFSA, in this case, is the treasury where you are accumulating wealth and thus, tax-free income as well as capital outlay that is often required once retirement sets in.
You should have a goal in mind, which gives direction, and certainly start to be proactive. Decide that the account will not be touched for a lock-in period, which you impose on yourself. You really do have to do that to see the exponential effects of the tax-free interest being reinvested and yourself earning interest on that growth and then further interest. A fun thing to do is to not check your account too regularly, (except, of course, if you have stocks in it), and surprise yourself! So your aim at this point must be intense savings and investment in the TFSA, cut corners where necessary, eat vegetarian pasta twice a week (they say this saves a whole lot!), do what it takes and top up your wonderful TFSA which is the ticket to your dreams!
Make sure you keep an eye on contribution room and don’t exceed it and incur penalties for yourself (1% per month until the excess is withdrawn), and don’t fall below it for not having made the most of carry forwards: unused TFSA contribution room does get added on to that of the subsequent year and so do withdrawals.
For the Person under Forty Years of Age
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A Tax Free Savings Account has great pertinence to people less than forty years of age. The family is younger at this point and many contingencies crop up; unexpected expenses are faced. This way, you can earn interest and make tax-free withdrawals as well without the worry of number of withdrawals and being penalized for taking money out. But even in this case, I would recommend more than one TFSA.
Have one with the bank you don’t normally use for daily transactions (so there’s less temptation to dip into it!). Into that TFSA, make an arrangement for money to go out of your main account as soon as you get paid. This should be a standing instruction and non-negotiable. The rule you impose upon yourself and your spouse is that this is the account that cannot be touched, no matter what. If your spouse is working as well, better still, have the same arrangement set up with their account.
Keep an eye on the upper limit of contribution of course. If you are adventurous, you can opt for an investment in a form other than cash. But this is not recommended at this point, when time is at a premium and savings must be built, you will not have much time to monitor investments. If you and your spouse can contribute the maximum possible to your respective TFSAs, that would be incredible news! This could bond families closer as well, with the common financial goal of growing wealth.
Then you can have a second account, which is the emergency fund, and that one can be touched when there is dire need. So you could do $4,000 in the first account and $1,000 in the second. Or choose whatever ratio you find suits you.
The Tax Free Savings Account certainly widens people’s horizons and adds to their range of choices. The TFSA also represents potential freedom. It provides liquidity, your money isn’t locked in the way it is with other accounts, and you can take it out at will (but do exercise some discipline with that last one!).
Initially it may not seem like much but soldier on and keep investing and you will find yourself happily surprised pretty soon, that’s for sure! Certainly from year 2 onwards!
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