The Most Common Mistakes of a Tax Free Savings Account (TFSA)
Avoid making common mistakes with your TFSA!
TFSA is Tax Free Savings account. It was an account which the Canadian government introduced back in 2009. It’s a great opportunity for us to invest money for the short term or long term and not have to pay tax on the capital gains. As many people find the TFSA accounts to be confusing, Here are four things that you should know about this account to avoid making mistakes:
- With a TFSA you don’t have to pay tax on your capital gains. If you have money in your Tax Free Savings Account and you’ve put it into an investment and that investment grows over time, you don’t’ have to pay taxes on the amount gained. You do have to pay tax on the original amount earned before you put it into your TFSA.
- Each year there is a limit as to how much money you can put into a TFSA account. This is your contribution limit or your contribution room. Every year since 2009, there has been a fixed amount of money that you have been allowed to put into this account. For 2017 the amount that you can put in is $5,500. If you’re Canadian and you’re over the age of 18 and you haven’t put money into your TFSA every year, the room from previous years will still be available for you. Check out the FREE downloadable for the history of your limit from previous years.TFSA Mistake Challenge
- If you take money out of your TFSA in a particular year and you want to put it back later in the same year you will have to pay a penalty. Unlike the regular savings account where you can take money out for a vacation or to buy a particular purchase you’ve been wanting… and then when you have enough saved, can just put it back into your savings. With the TFSA account, if you take the money out one year, that room will not be available to you until the following year.
- If you just take your money and put it in your TFSA and don’t actually invest it but leave it in cash, it’s not going to grow and that defeats the whole purpose of a TFSA. The benefit of having a Tax Free Savings Account is only accessed when your money is invested and you have capital gains. If you just leave your money in cash, you might as well just leave it in your chequing account.
If you use your TFSA properly and avoid making mistakes, it is definitely worthwhile! So take advantage of the tax benefits with a TFSA. Understand how the account actually works so that you can make it work to your full advantage. I think it makes for a really good target to try to save $5,500 in 2017. Even with small regular contributions to your account, you will be amazed at how your investments will grow.