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A tax-free savings account (TFSA) is a smart way to grow your wealth and begin saving for the future. The best part is, anyone can open one and start utilizing the full range of opportunities that come with it. You can keep your financial information secure while opening new accounts and forming new relationships with banks. The benefits of opening a tax-free savings account are endless, and there’s no reason why you shouldn’t open one today.
If you’ve never heard of TFSAs, it may be because they’re relatively new and controlled by the Canadian Revenue Agency. The contribution limit for a TFSA in 2020 was $6,000, but if you’ve never contributed to a TFSA before and have been eligible since its conception in 2009, your starting contribution limit is $69,500.
TFSAs offer more flexibility than individual retirement account (IRAs). Think of TFSAs as buckets or wallets containing multiple financial products and services. You can add stocks and bonds, exchange-traded funds, guaranteed-interest certificates (GICs), and actual savings accounts into your TFSA. Opening an account is free with just about any bank, and many banks offer a quick way to begin online.
You Can Make Tax-Free Contributions
Since you have technically already paid tax on the money you’re contributing to your TFSA, there’s no tax on the money you keep in or take out of the account. There are some exceptions: if your contribution exceeds the limit, you’ll be taxed at 1% for every month you’re over the maximum. Additionally, dividends received from US companies may be subject to a 15% withholding tax. Additional profits made within your TFSA, such as interest from savings accounts and money earned from other stocks and bonds, will not be taxed.
You Can Withdraw Money Tax Free
There are penalties for withdrawing money from an IRA before age 60, but you can take money out of a TFSA whenever you want. Any profits you gain from stocks or interest you earn from savings accounts cannot be taxed when you withdraw funds from the account, and you can withdraw as often as you want. If you incur a considerable expense, you can tap into a piece of your TFSA. It’s never too soon to start saving, but emergencies can happen anytime.
You Can Achieve Short- and Long-Term Goals
Whether you want to purchase a home or save for retirement, a TFSA can help you reach your goals. You can manage mounting debt and other bills with investments in a TFSA. For instance, you might have a guaranteed-investment certificate in your TFSA that gives a 1% return on your investments, which is more than an average savings account will give you. Any profits that you incur within your TFSA are not subject to tax, so all the interest you make is yours to keep.
The flexibility and control you get with TFSAs are unparalleled. The benefits of opening a tax-free savings account will stick with you throughout your life. You’ll only wish you had opened one sooner.