You might have overheard your friends talking about a TFSA. Or maybe you've passed the probationary period in your first job and your company asks if you want to contribute to both RRSP and TFSA.
So...what exactly is a TFSA and what is it used for?
A Tax-Free Savings Account (TFSA) is a registered savings or investment account available in Canada. It helps bank customers grow their financial gains without having to pay taxes on their contributions.
Some Facts & Benefits
The Canadian Revenue Agency (CRA) sets a contribution limit each year for TFSA.
The contribution limit for 2022, for example, is $6000 CAD. This means you can deposit up to $6000 CAD into your TFSA account this year.
Any unused contribution amount can be carried forward to future years.
Any withdrawals from your TFSA accounts are non-taxable.
Contributions are not tax-deductible, meaning they don't reduce your taxable income for your current year, but the interest earned by your contribution is tax-free.
If your income is $55,000 CAD and you contribute $5000 CAD towards your TFSA account this year and earn an interest of $500 CAD, then your taxable income remains at $55,000 CAD but there's no tax on the $500 CAD earned in interest.
You decide to contribute $3500 in 2022 into your TFSA. How much would you be able to contribute in total in 2023 if the limit remains at $6000?
Common Uses For A TFSA
Down Payment For A Home
A down payment is the minimum amount you pay from your pocket while the rest of the money for the purchase comes from the mortgage. The minimum amount you pay may range from 5% to 20% of the purchase price.
Typically, a TFSA is used to save for down payments,as the money is required in the short to medium term for the purchase. Plus, the money grows tax-free!
An RRSP or RSP is the traditional savings/investment option for retirement.
But, if you've reached the RRSP limit for the given year and wish to put more money towards retirement, then a TFSA would be your next best option to grow your money tax-free.
Remember, a TFSA is not the same as an RRSP!
Other Uses For A TFSA
Nowadays there's a lot to consider — the amount spent on travel, stay, sightseeing, food, etc. — while planning for a vacation.
When it feels like it's impossible to go on trips with the money you have at the moment, a TFSA can save your trip!
With a monthly/biweekly investment in a TFSA, you're not just setting aside some money. You're also growing that money towards your dream vacation.
Purchase/Lease a Car
If you're planning on leasing a car sometime soon or buying one second-hand, but just like your vacation plans, it's not possible with what you have in hand, a TFSA can come to your rescue!
Consider the make and model you want to buy, look at both purchase and lease options, decide how much you'll need to save, and start saving and growing your car purchasing fund using a TFSA account.
TFSA can also be used to save money towards...
Now that you know what a TFSA is and how you can use one...