Senior regional manager at TD Waterhouse Financial Planning Crystal Wong explains what these helpful accounts are and how you can benefit from them.
Both TFSAs and RSPs (retirement savings plans) can be great ways to save for the future, but they each come with different benefits. The difference, explains Wong, is that TFSAs do not provide you with a contribution receipt to reduce your taxable income for the year as RSPs do. However, you are able to save that money and have it grow on a completely tax-free basis. You don't have to pay tax on the income that comes from the savings' growth, and you don't have to pay tax when you withdraw funds from the account.
A TFSA can grow in whichever way you are most comfortable with, explains Wong. Depending on how you feel about taking risks and when you think you are likely to need the money, you can invest your TFSA in a variety of places, such as GICs, term deposits, mutual funds and more. Those comfortable with higher risk in exchange for greater potential for growth can take that route, while those more comfortable with a safe investment can do that as well.
A TFSA can be beneficial for just about anyone who is a Canadian resident and 18 years of age or older; it just depends on how you use it. Someone who is doing well financially and therefore in a higher tax bracket would likely want to maximize her RSP contributions first to lower her taxable income, explains Wong. But after that, a TFSA can be a great place to grow any leftover funds. On the flip side, young individuals who don't have a high tax bracket to worry about might benefit more from focusing primarily on TFSAs.
TFSAs were first made available in 2009, and individuals were allowed to invest $5,000 a year, tax free, each year. Effective this year, individuals are allowed to contribute up to $5,500 annually. But don't worry; if you didn't set up an account back then, it doesn't mean you can't benefit from all that saving time. You can open an account this year and contribute all the way up to $25,500, and then $5,500 every year after that, explains Wong.
Wong explains that the best advice she can offer is to speak with an accredited advisor at your bank to set up a TFSA that really works for you. Your advisor will assess your risk tolerance, when you're likely to need the money, what combination between RSP and TFSA is best and more, so you can figure out how you want to invest your TFSA. Talking to someone with the proper background and accreditation will help ensure you set up your TFSA in a way you can feel good about. Ask as many questions as you need to ensure you understand how your money is being put to work.
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