What you need to know about a tax-free savings account
First things first, a Tax-Free Savings Account (TFSA) is not actually a savings account. The name is misleading, but you should really think of it as a tax-free investment account. You can put exchange-traded funds (ETFs), stocks, bonds and contributions from your real savings accounts into a TFSA, so your money can grow tax-free. Read on to find out the many pros and the very few cons of starting your TFSA today.
The biggest pro to a TFSA is easy to recognize: it’s tax-free! Any money you withdraw is all your money, with no tax fees added on. You need to regularly contribute to your TFSA to watch the stocks within it grow, but you can take it out anytime you want and very easily.
It’s also especially beneficial for retirees since it doesn’t count as income and can be taken out without affecting other retirement finance plans.
What’s the catch
One of the things you need to watch out for is the contribution limit. The current maximum is set at $5,500 per year, but that limit usually grows each year. If you invest over the max amount, you’re usually charged a small percentage fee for every month after going over the limit, until the start of the next year.
However, if you withdraw money, the amount you withdraw is added to how much you can contribute the next year. So the following year you could invest $5,500 plus the amount withdrawn previously.
Take the plunge
It seems like the only setback to a TFSA is being wary of the limit. But there’s no minimum, so as long as you’re not overcontributing, you could have a nice little nest egg growing with very little to worry about.
Start with buying a couple mutual funds for your TFSA and contributing $50 a month. You’ll be amazed at how your money can grow, and it’s nice to have a backup plan in case you need cash in a crunch. Talk to a financial expert and get started with your TFSA today!