Tax-Free Savings Account (TFSA) 10-Point Overview (The Basics)
1. Start ASAP at 18 years old
The minute Little Bun turns 18, he is opening an account and working on maxing it out, along with any RRSP (Registered Retirement Savings Plan) contribution room he may have had/gained.
2. Max it out (that’s your goal)
It’s now at $5000 a year, which is $416.67 a month. Not a small chunk of change, but manageable perhaps.
3. Use it as your emergency fund if needed
This, over the RRSP, is a better place to stick your money as an emergency fund, or for a home down payment. It’s better than saving it in a regular high interest savings account but in an ideal world, you’d have your RRSP maxed out, your TFSA maxed out, and a SEPARATE emergency fund or down payment savings fund on the side.
4….but try not to, should invest it instead
Basically, the more money the better. Treat your TFSA like a retirement savings account.
If you are saving for an emergency fund or for your home down payment, it means it has to be in a safe, high-interest savings account, which means 2% is the max you can hope for, versus an 8% – 12% investment return over a long period of time. You’re LOSING OUT on 6% – 10% a year in gains.
5. Stick capital gains stocks in here
Capital gains are taxed at 25%, but 0% tax is better, so if you plan on buying stocks specifically for capital gains, this is a good place to put them. Might as well, to save money.
6. Stick dividend-paying stocks in here
You don’t get taxed remember? All dividends = $0. And if you reinvest the dividends, you get even more stocks, without paying taxes.
7. Designate a successor / beneficiary
For spouses, designate a successor NOT a beneficiary because it will mean it transfers over to your spouse easily without a holding period. For children and anyone else, they’re beneficiaries.
In Québec this successor thing doesn’t exist, you can only do a beneficiary, and it’s a WILL that determines who gets the money, so make sure you have one especially if you’re common-law (if you’re married, they assume the spouse gets it).
8. Use your RRSP tax refund to top it off
When you get an RRSP tax refund from contributing, throw it in here. Don’t spend it. Or use it to max out your RRSP. Either way, save it.
9. Try not to put it in savings / GICs
You’re losing money when you do so. The max you can hope for, versus an 8% – 12% investment return over a long period of time. You’re LOSING OUT on 6% – 10% a year in gains. You should do this only if you plan on using it in the short-term to buy a home and need to access the cash quickly. But.. still. The best course of action is to pretend the RRSP and TFSA are retirement accounts, and untouchable.
10. Save here if you’re making under $50K
The tax credit you get from maxing out your RRSP under a $50K income is too low to be significant in dropping you down to a lower tax bracket.
You can see that the tax credit savings up to $50K is only $2832 a year. It’s not $0 but it isn’t significant.
Therefore, the TFSA is more flexible and easier to access under a $50K income.