Estimated reading time: 7 minutes
Contribute to a Tax-Free Savings Account (TFSA) for more financial flexibility. Learn why we invested in one & why it’s a great option for extra cash.
Not everyone has extra cash at the end of the month once their bills are paid.
For those that do, the TFSA may be a great place to park your cash.
Today, I want to discuss the Tax-Free Savings Account and why we invested in one.
Tax-Free Savings Account (TFSA)
What is the Tax-Free Savings Account?
Most people have heard of the Tax-Free Savings Account as it’s in our faces and on the menu at every financial institution and then some.
People still ask me what a tax-free savings account is.
I hear it so often, I understand now that some people don’t know about it or care to learn about it for one main reason: they have nothing to contribute or think they don’t.
I realized if you have any “extra” money, you will investigate your options, and if you don’t, you won’t.
In Jan 2009, I coined the Registered Retirement Savings Plan (RRSP), the big brother to the Tax-Free Savings Account available to Canadians 18 and older.
If you have the cash, you can contribute $5000 to $10,000 a year (see 2015 TFSA increase note below) or $833 a month to max out your TFSA in 2015 and 2012.
Contribute any more than that, and you potentially face a penalty, so make sure you know what you are getting into.
Any unused portion can carry over into the next year as we have done with our unused portion.
Tax-Free Savings Account 2024
The best part is you never pay tax on what you earn inside the TFSA, and it’s a great tool to save for retirement or savings.
Every year, we get a T5 from the Bank with interest earned in our “High Interest” joke of a Savings Account that we have to claim.
I just think it’s rubbish, but like some, we are on the fence about what to do with our Money.
A Registered Education Savings Plan (RESP) is a savings plan for your child’s education.
I only know this because I love finance, but since we have no kids one child in 2014), there really was no need for me to research it.
Update: We’ve researched and contributed the maximum amount of $208.33 monthly into our son’s investment RESP.
I still believe that we need to teach children about Money and that, in part, they should be responsible for saving for their education as well.
My point is that if you don’t have kids, you don’t want to know or care about it; the same goes for extra money and TFSAs.
Maybe that’s a box type of thinking, but it’s what I believe.
Who Benefits From Tax-Free Savings Account Investing?
I don’t know many young families that can pay for a mortgage, student loans, children, Insurance, RESPs, RRSPs, TFSA, and other debts or savings plans they might have.
It’s overwhelming for some Canadians to simply pay for “life” and so-called perks along the way. I say so-called as nothing in life is definite.
In 2011, Harper went on about (talked about) bumping the TFSA to $10,000 a year (but it never happened) (Update: Now it has in 2015).
That sounds good, especially if I have more than the $5k to put away.
It’s no different than when you get a bump in your line of credit.
No one forces you to use it, but it’s there.
Another perk is when it’s time for older people to convert their RRSPs to a Registered Retirement Income Fund (RRIF), they can dump it into a TFSA to shelter it if/when they need it tax-free.
Here’s hoping the TFSA is still around when we retire.
If you’ve maxed out your RRSP and have money, you can dump it in a TFSA as the option is available.
Are TFSA Investments Only For Rich People?
There’s been talk about who benefits from a TFSA, stating only the wealthy.
I don’t agree, although everyone’s belief in wealth is different.
If you have defined benefits at work, you might not want to contribute to an RRSP, so the TFSA is a perfect place to stash your Money.
If you are in a low-income tax bracket now and plan to be when you retire, it makes sense to stump up the cash and park it in a TFSA.
Keep in mind inflation when thinking about the future and how it will impact your finances and investments.
We purchased our house in 2009 at the height of the economic crash and missed out on a year of TFSA contributions.
We still haven’t caught up, nor are we maxing out our RRSPs, even though we likely can.
I’ve had some questions about the amount of money in our savings, but we are sitting on it until we make a decision.
We put away a combined total of $1166.66 a month for 2024 towards our TFSAs.
(Our new 2015 TFSA Budget total will reflect the 2015 TFSA limit increase of $ 8 of 33 month to a total of $10,000 yearly for my wife)
Living the frugal lifestyle as we do by using coupons, sourcing out deals a, and frequenting second-hand shops is not for everyone.
I can tell you the rewards of not stressing over money make it worth it for us.
Emergency Savings Plus A TFSA
I do believe everyone should have an emergency savings plan; some even use the TFSA as a fallback in case something arises in their lives.
You can easily pull your Money from a TFSA at any time, although if you are investing within a TFSA, you may want to commit to some long-term investing.
The RRSP o,n the other hand, will cost you if you plan to dip in, so think twice before you make that decision.
When people tell me they can’t afford to contribute to a TFSA, I ask them if they have a budget.
Most times, the answer is no, but I want to, or I’m thinking about it, etc.
We wouldn’t be able to contribute and save what we have today without smart spending and budgeting.
If you spend more than you make, you are not saving and will never save.
You need a budget; everyone does, no matter what supposed class of riches you belong to or think you belong to.
Once you know where all your money is going and pay off the fixed expenses, you can then divide your money into other categories in the budget.
Here is where you will be able to say, ok, I can put $50 in a TFSA, and I can contribute to an RRSP or RESP, etc, depending on what makes sense to you and your future.
Related: Should I invest in an RRSP, TFSA, or Non-Registered Investment?
Do I Need A TFSA?
So, if you have to ask yourself if the TFSA is right for you, you need to talk to an advisor.
- Investigate your finances.
- Know your net income.
- What tax bracket are you in?
- Do you have defined benefits with your employer?
- Is your budget in check?
- What are your current financial priorities?
If all else fails, remember a Rich Life doesn’t have anything to do with money!
Please note: TFSA limits can change from year to year, so please check with your bank or government agency for accurate numbers.
Discussion: How much are you stashing away in a TFSA monthly?
Please leave your comments below.
Thanks for stopping by,
Mr. CBB
Just to be clear, Harper never bumped up the TFSA to $10,000 per year and it still sits at $5,000 per year.
I never understand why someone would ask someone else what a TFSA was instead of just going to the government website where the rules are clearly laid out. Wouldn’t that be the most trusted source of information?
Hey, Yes I know he didn’t bump it up, I don’t think that is what I was trying to say, sorry if that’s what you perceived. It’s true any time someone wants to learn they should always seek professional advice or simply the link you posted.. thanks for posting that. Cheers Mr.CBB
Yes I put Harper went on about bumping the TFSA.. that means he was “talking about” wanting to bump it up.. likely my British English you misunderstood, although I am still learning.. Cheers. Mr.CBB
Ha ha… no I understood you fine. 🙂 I just wanted to UNDERLINE that point in case some speed reader went running off to over contribute to their TFSA.
Oh, I went back and put it in brackets just in case someone thought that’s what I meant. I thought oh crap if CP thinks that and I know you’re on your game then someone else might misread it.. Anyhow I put the edit in beside it… Bloody English, we think it’s the same but sometimes it’s not.. The wife and I still argue about how to say aluminium… lol..
sorry to say TFSA is not for me. I have a budget, but with kids, a mortgage, etc.. its near impossible to put away that much money a month or year! I do think that everyone should have an emergency fund though.
I agree an emergency fund is very important. I also realize that for most people a TFSA is a “nice to have” especially if you are raising a family. Thanks for your comment Wendy!! Mr.CBB
Where do you keep your emergency fund? You could keep it in a TFSA and withdraw it when needed with no penalty.
We have TFSA’s and use them as an emergency savings fund. We have used them a few times and they were very easy to access. I wish we didn’t always have to touch that money! Hopefully we’ll be on the right track soon!
Lots of people stash their money in a TFSA and use if for an Emergency Savings. I’m sure Jen that before you know it you will have your budget sorted and be on your way to building Net Worth!!! Cheers Mr.CBB
I know this sounds kind of 1950s, but my husband has always dealt with the finances. He’s a business graduate, and is my human calculator! So far he has done well for us keeping us out of debt (other than our cars and mortgage). I think I will forward this to him as I know he has a meeting coming up with our financial advisor. Thanks for giving me more of a financial understanding!!!!
Thanks for the comment Zayba!
Like Canadian Performers Money says any time you are unsure always talk to a professional in person..yes you can read government pamphlets and websites but if it’s not making sense go to the pros… most important tip ever when you are playing with your own money and are not one who does their own investments.
I think the TFSA is great and have been fortunate enough to be able to put the full amount in every year since it came out. I will continue doing so while I can before circumstances change. I also contribute to an RESP for my daughter so that she hopefully will not have the debt I had when I graduated from university. Thanks for sharing.
Awesome, children who have parents who can do this for them are so lucky. Every time I think about it I wonder why it wasn’t around when we were young although I’m happy to see things have evolved. Thanks Joanna for your post.. Mr.CBB