It's Time To Talk...about the TFSA
Feb 09 2020 1
Feb 09 2020 1

A what?

A Tax-Free Savings Account (TFSA) is a Registered Investment Account that has a whack-load of financial benefits. Want to know why I bolded and underlined the word investment? Because this account will benefit you the most when you hold investments in it, and not use it as a day-to-day savings account. 

Here are some of the main benefits of the TFSA and why you should open one (and use it) right now.  

The Benefits of the TFSA:

  • Any income that you make from investments within this account is tax-free (hence the name). This means that you don't have to claim any income you've made from your investments on your tax return at the end of the year. I'm talking about free investment income here people.

    • Let's take an example - shall we?: Mary Lou Cannary contributed $10,000 into her TFSA on January 1, 2019, and invested it into the S&P500 ETF (VFV). In all of 2019, VFV made a whopping 25.13% return. WEO. What does this mean for Mary Lou Cannary at the end of the year? Well, her investment of $10,000 now has a current market value of $12,513 as of December 31, 2019. Now, because she invested this money within her TFSA, she could withdraw her investment income of $2,513 without paying a gosh-darn penny of income tax. Pretty neat huh? 

  • You can contribute to your TFSA from the age of 18 and do not need a job to open one (unlike the RRSP). The contribution limits change every year, based on inflation (mostly). As of January 1, 2020 you can contribute up to $69,500. If you're unsure of what your contribution room is, you can sign onto your CRA My Account for Individuals and find out. 

    • If you don't have a CRA My Account for Individuals, you should get one. Sign up here

  • The money that you contribute to your TFSA is used with after-tax dollars so there are no taxes to be paid when you with withdraw the funds, making the TFSA a relatively liquid investment account (depending on the investment holdings within the account itself). This is a great account to use if you're needing money on a short or long-term basis; travelling, getting married, downpayment on a house, sending the little ones off to school, beefing up retirement income, etc.

What the TFSA is not:

  • It is NOT a type of investment (contrary to some peoples' belief). You cannot purchase a TFSA. It is an account that is registered with the CRA which has tax benefits to it. Don't just put money into your account and have it sitting there. The whole point is to have your money working for you by investing it in either stocks, bonds, mutual funds, ETF's, Reits etc. 

  • It should not be used as an everyday bank account. Although you can deposit and withdraw into your account when you want, there are some rules surrounding this so make sure you understand them. The CRA really breaks that down here.

    • When I first started investing in my TFSA, I made the mistake of not understanding the rules (because I was an 18year old and nobody was there to teach me). Unfortunately, I was taxed by the CRA and had to pay a big chunk of money ($300 buckaroos!). I don't want this happening to you so make sure you know your limits, and play within it. (See what I did there?)

Where Can My TFSA Be Held?

  • At a financial institution of your choice. Your financial advisor will be able to open up a TFSA for you where they actively manage it (just be aware of the fees that you may be incurring as these can sometimes be hidden). 

  • With a Robo-Advisor. This is a great option for those who are trying to get away from the bigger financial institutions, want lower fees, and are big believers in ETFs. 

  • You can Self-Direct it. I do this. And I love it. Low fees, freedom to choose the investments I want, and the money that I make within my TFSA are completely made due to my efforts.

Conclusion?

If you've already opened a TFSA and have investments sitting within your account, you're doing good things (so long as your investments are making money). If you have a TFSA, have money sitting in one of those "high-interest savings accounts",  and you're not needing that money any time soon, you may want to rethink your strategy.  

If you haven't opened one yet, get out there and open one up today. You'll be happy you did. And if you're still somewhat confused, scared, excited, nervous, and potentially need some one-on-one coaching, contact us for information on our coaching program


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Chris
Mar 06, 2020 06:50:26

How do someone get 23% return on TFSA and how do i ask my financial institution to invest on ETF/stock ? Or can i do it by myself?

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