Is the TFSA for me??
This post will attempt to answer who the TFSA is best designed for. (Hint: Everyone.. get yours started today!) We often came across a common misconception on how the Tax Free Savings Account (TFSA) actually works for Canadians.
Here’s the problem, Tax Free Savings Account. Did you catch the hint? Most Canadian investors associate the “savings” in a TFSA with their “savings” account at their bank. This error costs you money because unlike your savings account, you can hold any stock, ETF or Option within a TFSA. The potential returns of these investment options far exceeds what the bank pays you in interest for your “savings” account.
So let’s start;
What is a Tax Free Savings Account (TFSA)?
Put simply the TFSA is an account that lets you grow your money tax free. That’s right, any income earned through dividend or capital gains grows tax free, even upon withdrawal! As of 2014 if you qualify, you’d have the ability to put $31,000 into your TFSA.
Surprisingly, the Canadian Government has a good overview of the program. Take some time to explore the link
In addition, The Star had a recent article on the TFSA that’s worth checking out.
How to use the TFSA?
First things first… you’re ready to invest when you’ve paid down any and all of your high interest debts. (Check back soon for a post on budget techniques and the software tools we like to help you get started)
With your bad debt out of the way, the TFSA is likely the best tool to help with both your short term and long term investment plans. You can use this account to grow your money and take the gains to pay for a vacation, that reno you’ve been thinking about or further debt repayment. With the right strategy we think the TFSA is a fantastic tool to help you take control of your financial future.
Why do Canadians have the wrong idea about their TFSA?
We’ve already covered the issue of language in the “savings” point made at the top of the article. The problem lies with the marketing arms of the major financial institutions. They’re in the business to make money off your money! That’s the problem, too often we’re giving up what is rightfully our money and don’t realize exactly how much because we’re not getting impartial, unbiased advice. Perhaps I could offer two examples to back this up..
I’d like you to note the order in which these two financial institutions choose to arrange their TFSA accounts. If you’re looking for the spoiler; the one that will benefit you the most is listed last…
TD
BMO
Conclusion
- The TFSA is a powerful investment tool for Canadians 18 and older
- You’re ready to invest when you’ve eliminated any and all of your high interest debt. (Think credit cards)
- The TFSA allows you to grow your investments tax free! even the withdrawals
- Already have a TFSA? We’ll help you benchmark your performance and educate you on the options available to get the return you deserve.
- Thinking it’s time to get a TFSA? We’ll help you get started and put you on the right path for success.
UPDATE Nov 10-2014 - Note the poor use of holdings within the TFSA
BMO Study