How to Maximize Your TFSA Account

What is a TFSA

Before 2009, when it came to putting away money for retirement, you had two primary accounts to pick from; RRSP and non-registered accounts. Both of these accounts were largely used for retirement planning until the introduction of the TFSA, which provided a third account option for both short-term and long-term saving needs.

The account is great because it has the buzzword everyone has an opinion about; taxes. But this account makes everyone happy because it enables anyone to shelter their after-tax earnings from further taxes. Here is my top reason why you should open a TFSA account.

Why You Should Open a TFSA Account

Provides greater flexibility

Life was pretty simple once upon a time. It went something like this; finish school, get a job, get married, get a house, start a family, send the kids off to college, and then retire. For the most part, we still want the same thing, but our world is a little more complicated, which means the pathways are not as straightforward as they used to be. You might start your careers later in life, pushing off home ownership or perhaps starting a family later. TFSA account offers far more flexibility than an RRSP to help manage life’s changes better. A TFSA account provides greater accessibility to proceeds if things are not going well in your career. It also enables you to plan for your retirement without the fear of locking up money.

Future tax savings

The second benefit TFSA accounts offer to its current and future tax savings. Capital gains, interest, and dividends earned on TFSA contributions will not be taxed. They also are not taxed upon you pulling the proceeds from the account. Unlike the RRSP account, you do not have to report your TFSA withdrawal as additional income when filing your taxes. That’s an important feature, as some government-sponsored benefits might be impacted if you earn too much income when you retire.

Doesn’t impact government-sponsored benefits

Since the TFSA contributions have already been taxed, TFSA withdrawals do not impact government sponsor plans that you might be entitled to when you retire. Government sponsor plan such as Old Age Security (OAS) is not impacted by you pulling money from your TFSA. Furthermore, unlike the RRSP account, you do not have an age requirement to pull out the funds or close down the TFSA account. Since there is no de-registration of a TFSA account, you do not have an annual withdrawal minimum limit, such as the case when you convert your RRSP into an RRIF.

How to Set Up Your TFSA Account for Success

Open at least 3 different TFSA account

You should set up at least 3 TFSA accounts. One should be what I call a regular/emergency savings account. One should be your short-term to long-term savings that hold non-retirement investments or savings.  And the third TFSA account should be your retirement TFSA saving account.

Why open up 3 accounts? By opening up the 3 accounts, you can clearly identify each account’s purpose. Often people group their emergency, vacation, and retirement saving into one TFSA account. That’s not a good idea as the account lacks a clear purpose, which means you often will access it more frequently and fail to achieve any of your goals. It’s important you understand what each TFSA account is for so you only access that TFSA account for that specific reason. Avoid opening a TFSA account just because you want to. And always remember, while you can set up multiple TFSA accounts, they cannot exceed your available contribution room.

Do not hold all your TFSA accounts at the same institution

We increasingly look for options that offer us the greatest convenience, but when it comes to TFSA accounts, convenience can be bad. Avoid holding your TFSA-designated retirement account at the same institution as your TFSA savings/ emergency account. It’s much easier to pull money from your TFSA account than an RRSP account; therefore, you want to create some barriers to provide you some time to consider if pulling the money from your TFSA retirement account is necessary. Do not create an online log-in for this account at first. Instead, opt for paper statements only and pick yearly updates if possible. Basically, you want to set up a TFSA retirement account so that you must go to the institution if you need to pull money from it.

The idea is that if it’s really not required, you will probably not bother as it’s not the most convenient option for you. With respect to your emergency and short-term saving TFSA, these can be opened at your day-to-day banking institutions as you will need immediate access to these accounts.

Treat your TFSA retirement account like an RRSP account

To truly take advantage of a TFSA account, particularly the one you’ve designated as your retirement TFSA, you must treat it like an RRSP account. That means you should hold similar investments you would if it was an RRSP account. It’s remarkable how many Canadians have a TFSA account and have cash in their TFSA.

Putting $20,000.00 in a TFSA as cash is pointless. The true tax saving with this account is achieved when you invest that $20,000.00 to generate investment growth over your lifetime, which could result in that money growing to $40,000.00, which means you get to keep $20 000.00 in growth money that you do not have to pay tax on. If you put $20,000.00 in a TFSA account that generates 0.001% is not effective, and you should put that in a savings account if all you want is to stare at the $20,000.00.

You should hold yourself to the same standard you would if your TFSA account was a retirement account similar to an RRSP account. Avoid pulling funds from your TFSA investment account unless it’s an emergency and all other options have been exhausted. If you decide to borrow money from your TFSA account to purchase your first home, treat it like using the first-time homebuyer program and pay it back over 15 years as the first-time homebuyer program requires if you pulled the fund from an RRSP account. If you treat your retirement TFSA account like an RRSP account, you will be far more successful and archive far more tax benefits when you reach retirement.

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