I always get a little giddy in January. Ok, I’m giddy most days, but January is especially spine-tingling because the New Year marks another opportunity to save money in my Tax Free Savings Account (TFSA). The TFSA is a brilliant vehicle for Canadians looking to stash some extra cash for a rainy day or to save for a new home, car, or even for retirement without paying ANY tax on the income earned. Yay!
If you’re 18 or older, you can open a TFSA at your financial institution of choice and save up to $5,000 in cash, stocks, or bonds every year tax free. Are you getting giddy with me yet? Here are 5 reasons to love your Tax Free Savings Account!
1. Earn tax free income in your TFSA: Contributing up to $5,000 a year to your TFSA saves you from paying taxes on income earned in the account. For example, investing $5,000 at 3.5% gives you $175 tax free in one year.
2. Your TFSA savings add up: Over time the savings in your TFSA can really add up. For example, let’s assume you have $25,000 invested in a standard high interest savings account at 3%. After one year you will earn $760.40 compounded monthly. Depending on your income tax bracket, the government takes around $225. With a TFSA, you get to keep everything. These savings will continue to add up too, especially if you continue to contribute annually.
Want to see the money add up? Check out this Savings Calculator to see when you’ll be a millionaire!
3. Your TFSA is flexible: Your TFSA is also far more flexible than a Registered Retirement Savings Account (RRSP) since you can withdraw your cash without any penalties, and the contribution room is always available. So if you need a new roof or have a car repair then you can use your TFSA without any penalties — just replace the money for more tax free savings when you can.
4. You can carry forward: If you can’t find the cash to save in a TFSA this year then don’t worry. In a given year you can carry forward your unused contribution room to future years.
5. Your TFSA won’t impact other income-tested programs: If you’re receiving Employment Insurance (EI), the Guaranteed Income Supplement (GIS), the Canada Child Tax Benefit, or any other income-tested benefit from the government then there’s no worries of a claw back if you withdraw from your TFSA. Neither your income earned in a TFSA nor withdrawals affect your eligibility for benefits or credits.
Your Two Cents: Do you contribute to a TFSA?
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Your Two Cents:
Lets get realistic where do you get 3% in a high interest savings account? The maximum you will get is .75%. On $ 5000 thats $37.50,and then the bank could charge you up to $100 management fee.Someone has not done their homework.
@W.Peter Sears There’s hope! Interest rates are low these days, but the Manitoba credit unions (at the time of this comment) are offering a 5-year GIC at 3.85%, with no account fees.
For example: http://www.achieva.mb.ca/ProductsRates/RatesChart.aspx You don’t need to hail from this province to invest either.
Unfortunately,In your initial blurb, you did not mention the 5 year GIC hold.Most or all investors want to know what they can get per year. Spell it out correctly.Regards W.Peter
@W.Peter Sears Hi again. The numbers I give in this post are clearly stated as examples, showing readers the power of investing in an a TFSA. My purpose is not to give updated GIC or savings rates at financial institutions across Canada. The Globe and Mail has a website widget that solves that dilemma. Although, I am happy to point anyone in the direction of a better TFSA deal when they ask.