In my last post, I talked about RRSPs – formally known as registered retirement savings plans – and why should you use one while saving for retirement. Another great way to save for retirement – or just a general future expense like a house down payment is to use a TFSA. You can use a TFSA for any kind of savings goal you want!
What is a TFSA?
TFSAs are short for Tax-Free Savings Accounts. But you don’t just put money in them and hope for a little interest. You can use them for a variety of investments – from bonds to mutual funds to ETFs.
The most important thing you need to know about a TFSA is the magical phrase “tax-free”. This means that you aren’t taxed on any gains in your account – and you aren’t taxed on any withdrawals!
So what’s the catch?
You may be thinking that a TFSA sounds too good to be true. But the Canadian government wants to encourage Canadians to save – whether it’s to buy a house or provide additional income in retirement. After all, the more money you have in retirement income, the less you’ll be eligible for from the Canadian government in benefits like Old Age Security. So the government isn’t entirely selfless here.
How do contributions work?
The TFSA contribution limit for 2021 is $6000. TFSA limits have changed over the years – from being as low as $5,000 to as high as $10,000. Like RRSPs, contribution room rolls over – so if you don’t have enough money to make the maximum contribution one year, you can always catch up another time. Unlike RRSP contributions, all TFSA contributions must be made in the year they are intended for – so you can’t make a contribution to your TFSA in January 2021 and actually have it count towards your 2020 TFSA.
How do I know when I should choose a TFSA over an RRSP?
In an ideal world, we’d all have enough money to maximize out our TFSAs and our RRSPs every year. However, that’s just not realistic for most of us.
If you want to save for a specific goal that isn’t retirement – like a car, a vacation, or renovations for your house – then a TFSA is definitely the way to go. In addition, if you make a fairly low income and won’t really benefit from RRSP deductions or may need your money before retirement, then a TFSA is also the way to go.
If you make a high income and can benefit from RRSP deductions as well as the security of not needing your money until retirement, then an RRSP may be a better choice.
Now You Know!
You’re ready to get started contributing to a TFSA and saving for your future! Let me know in the comments – do you prefer a TFSA or an RRSP?
