TFSA – What Is It & How Does It Work
Want to start investing and you’re not sure where to start? You’ve come to the right place. In Canada, lots of millennials are saving – in fact, roughly 80% of the generation has savings. But are they really using their money to it’s fullest potential? According to a survey conducted by the Ontario Securities Commission, only 1 in 2 millennials are investing their money. As we all know, for millennials the struggle is very real when it comes to even thinking about affording a house in Ontario. However, by investing your money properly, your house saving goals may not be too far away. One really great way to start investing, particularly for young adults, is by opening a TFSA.
What is a TFSA?
TFSA simply stands for ‘Tax-Free Savings Account’. It was created by the federal government in 2009 to allow and motivate Canadians to save money in which contributions are non-deductible for tax purposes. Any amount withdrawn from the account is tax-free (unlike RRSPs which have a penalty for withdrawals) and can be used for any type of savings goal you may have (such as buying a house perhaps!). TFSAs can be opened by any Canadian citizen with a valid SIN number above the age of 18. Although you must pay taxes when putting money into the account, in the long run it’s considered beneficial because the money you take out is exempted from taxes.
AND, Opening a TFSA is extremely simple:
- Open an account.
- Put money into the account.
- Watch your money grow.
There are however some risks to be cautious of when opening a TFSA. Because TFSAs are so popular and you can open as many accounts as you’d like, it can be easy to lose track of how much you contribute in a year. For a TFSA there are limits to how much you can contribute in one year (which varies year to year). For 2020, the contribution limit is $6,000 and the lifetime limit is $69,500. If you accidentally exceed your yearly limit as allowed by law, you will be charged 1% per month on the amount you exceeded. When used properly, TFSAs can have amazing turnarounds, however, if not properly managed, your loss can be detrimental.
Why is this important when looking for a home?
It’s important to keep TFSAs in mind when looking for a home because these accounts are a great way to invest money to put towards buying a house – and any withdrawals are tax-free. If you’re saving for your first home and want to put aside more than the maximum, another option to look at is using an RRSP. Not only will they help decrease your income taxes, you can access those funds in addition to your TFSA when the time comes using the Home Buyer’s Plan which you can learn more about here.
Interested in learning more about investing money and seeing if a TFSA is the right move for you to start saving for your future home? Look no further! It’s important to talk to an expert about which financial path is the right one for you to take and I have the knowledge and experience to help you find that path. Contact me today at 705-315-0516 and let’s find out if opening a TFSA will help you get closer to achieving your financial goals.