(For American readers, the TFSA is quite similar to the ROTH IRA. If you're reading and not from Canada or the US, have a read below and let me know if you have a similar account available to you and let me know where you're reading from. Always excited to connect!)
The Tax Free Saving Account (TFSA) was introduced by the late Jim Flaherty, Canadian Finance Minister, and came into effect January 1, 2009. The TFSA was introduced with very little fanfare because the account was capped at $5,000. Fast forward 10 years and the limit has increased to $63,500. I get so many questions about the Tax Free Savings Account and I love to answer them because this account, in my opinion should be the cornerstone of Canadians investment strategies. Below I've detailed 3 things to know for TFSA beginners;
1) Your contribution room breakdown:
The contribution room has grown from $5,000 to $63,500 over the past ten years. Here is the breakdown:
2009–2012 $5,000 per year, total room: $20,000
2013–2014 $5,500 per year, total room: $31,000
2015 $10,000 one year, total room: $41,000
2016–2018 $5,500 per year, total room: $57,500
2019 $6,000 per year total room: $63,500
As long as you were born in 1991 or earlier, you qualify for the full amount. If you were born in 1992, you would have to minus the first year seeing as you were only 17 years old. Those born in 1992 have $58,500 as the 2009 contribution room ($5,000) does not count to your total. If you were born in 1993, you would subtract the 2009 and 2010 totals, leaving you with $53,500 in contribution room. The only way your contribution will differ from the above is if you have opened an account and made deposits over the past ten years. If that's the case, head over to your my Canada profile and the Canada Revenue agency will tell you what your current contribution room is.
2) Investment Account:
My biggest issue with the Tax Free Savings Account is that they didn't name it the Tax Free Investment Account. I guess TFSA has better ring to it than TFIA. I have had this conversation with more than one person who asked me why I can make 24% in a year (what's up 2016), and they only made .48%. I ask what are you invested in and they answer; my TFSA. If you contribute money into a TFSA, it will make interest but that interest is extremely minimal. You need to have that money working for you. Inside a TFSA, you can invest that money into stocks, bonds, ETF's, GIC's and several others. You can make a decent return with reasonably safe investments if you do your homework, and make smart investments. The key is to know your risk tolerance and your time horizon. The problem I see with young investors make is that they always want to swing for the fences and lose patient which leads to mistakes.
3) Difference between TFSA and RRSP:
If you're reading this and you're Canadian, chances are you've heard of a Registered Retirement Savings Plan (RRSP) so I'll get right into the major differences. The RRSP is contributed with before tax dollars and the TFSA is contributed with after tax dollars. When you contribute to an RRSP, you'll get a tax credit at year end and the amount will depend on your income, tax bracket and contribution amount. Contributing to a TFSA will not get you any type of tax credit. Money in your RRSP will grow tax free until you start withdrawing it. The RRSP money will then be taxed at your current tax bracket. The best laid plan for the RRSP is to contribute when you're making your max salary or yearly taxable income (thus bringing your taxable income lower), and withdrawing later in life when you're not making any, or a smaller income. Money in your TFSA will grow tax free and you can remove it tax free. The RRSP is a supplement to a pension whereas we have not seen the full ability of the TFSA yet. My TFSA will be a money making machine through dividend payments. My goal is for my wifes and my TFSA's to both payout $2,000 a month by the time we are ready to retire. Big goal but we'll get there.
For all you in relationships/marriage etc, keep in mind that everyone over the age of 18 can open an account. To keep it simple I will use my wife and I and our current contribution room. We were both born before 1991 so our combined contribution room to the TFSA is currently $127,000. Say that number out loud to get the full experience. Now imagine that was maxed out. Imagine you changed a few bad habits or added a side hustle where you could free up some extra cash (contribution room increases $12k a year for couples). Fast forward ten years and the total contribution room for two adults born before 1991 will be $250,000 so long as the contribution keeps going at the current pace. Since we've had the liberals and the conservative parties show they are committed, I don't believe the contribution room will slow down but will keep increasing with inflation.
Do yourself a favor and open a TFSA. My suggestion would be to auto deposit 50-100-150 dollars a month and then start learning. I started funding my TFSA in March 2015 and made my first purchase four months later in July 2015. In those four months I read books on investing and financial education. I listened to audio books and podcasts on the same topics. I threw myself into learning as much as I could and it has benefitted me ten fold.
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