These days it feels like it’s impossible to afford anything and buying a house feels out of reach for many in the Barrie area. In fact, when it comes to saving money at all you may feel extremely overwhelmed and don’t know where to start. Whether you’re planning for retirement, planning to purchase your first home or want to go back to school, there are ways for you to invest your money to save up for these expensive life experiences. Opening an investment account can help you to save money and relieve financial stress down the line. By investing your money intelligently, saving that nest egg or the downpayment for your first home may not be too far away. A good first step into the investing world, especially for young adults, is opening up a Tax-Free Savings Account (also referred to as a TFSAs).

But, what is a Tax-Free Savings Account or TFSA)?

A TFSA is a savings account that was created by the federal government back in 2009 to motivate Canadians to save money by putting it aside and gaining interest. Any amount withdrawn from the account is tax-free. You put your money into the account, and it grows over time. Plus, you can add and withdraw money at any given time without a penalty. It’s great for people saving up for a vacation, a downpayment on a house, or home renovations. It’s also a smart place to keep a little extra in case you have a large emergency you need funds for. Maybe you need a new car, your child decides they want to go to law school instead of community college, or your basement flooded and you need to rip it all apart. Think of your TFSA as a rainy day or backup fund. Regardless of what you’re saving for, it’s a great investing tool to use, especially for young adults just starting out, learning the fundamentals of finances.

Things to look out for when it comes to Tax-Free Savings Accounts (TFSAs): 

Understand where the “tax-free” part comes in.

It’s important to note that you must pay taxes when putting money into the account, however in the long run it’s considered tax-free because any of the money you take out is exempted from taxes. For example, if you work at your job and take $200 from your paycheck and put it into a TFSA your employer would have already deducted the tax you would have to pay to the government for you. So, you have already paid tax on that $200 you put into your account. But, if you leave that $200 in your TFSA account for 5 years and over that 5 years you make $25 in interest, you don’t pay tax on the $25 it made in interest. And, when you take the money out of that account you don’t pay any fees or taxes on it at that point either.

Maintain self-control

Due to the fact that you can take money out whenever you want, it may be hard for someone to have the self-control to not spend the money that was put into your TFSA with the intention of saving it for later. Although you can take money out it’s important to remember that if you continue to take money out it won’t collect any interest. Interest needs to accumulate over time to reap the benefits of tax savings and appreciation in value.

There are limits

You can only put a certain amount of money each year into your TFSA and the amount varies year to year. If you put too much money into the account, you will be charged 1% per month on the amount you exceeded above your annual cap. It’s important to learn the ins and outs of what the account features are so you can optimize your investment to its full potential. If you find you are able to contribute more than the limit to your TFSA each year, know that you can have as many TFSA accounts as you would like, so opening more accounts instead of paying an overage fee is a smarter strategy than keeping it all in one account.

When should you get a Tax-Free Savings Account (TFSA):

You can get a TFSA if you’re a Canadian citizen over the age of 18 with a valid SIN number. It can be used for any savings goal you want. When it comes to taking advantage of this financial investment tool the earlier you start saving the better but, today is better than any day in the future if you haven’t started yet. If you are a parent with young children you might even want to start a TFSA account for them in your own name, and then once they are old enough you can cash that money out of your TFSA and they can put it into their own.

What other investment options are out there?

The most common other investment option is an RRSP (Registered Retirement Savings Plan.) The main difference between the two is that you get taxed when taking money out of an RRSP. It’s used for achieving long-term goals, like retirement. Any contributions to your RRSP fund can be deducted from your income tax each year up to your annual limit. If you’re in the higher income bracket, then investing your money into an RRSP is a good idea for the end-of-year taxes to reap the benefits of a possible return or not having to pay as much in income taxes each year.

But, there is an exception

The Home Buyer’s Plan is an exception when taking money out of your RRSP account for first-time homebuyers. If you qualify for this program and use your RRSPs towards the purchase of your first home, you won’t get taxed when borrowing up to $35,000. However, any many taken out of your RRSP for this purpose must be paid back to your RRSP over the next 15 years.

It’s also possible to open both a TFSA and RRSP account to save money for short-term goals on top of saving money for long-term goals like your retirement.

Whichever one you choose to invest your money into depends on your financial goals, tax bracket, family situation, life stage, and what you’re saving up for. Having a TFSA as an emergency fund, and having an RRSP for security is a smart plan to increase your wealth over time while ensuring you have a rainy day fund for those unexpected costs that might pop up. If you have any questions about opening an investment account or if you would like to review your investments to know if there are any options you could be taking advantage of, don’t hesitate to give me, Darren Robinson, a call at 705-315-0516. I am always happy to help you better understand your investments, options and to help you build a solid financial foundation for the future.