How to Build Up that TFSA and Why

Tax free savings accounts are more common than you may think. Learn about the benefits of opening one today.
By aha insurance - Feb 27, 2019

At aha insurance we continually explore ways to stay in control of all aspects of life – because we know life is about more than insurance. In our Life Matters series we talk about staying in control of your life and living on your terms. Control feels great!

Since the inception of this particular savings vehicle 10 years ago, Canadians have been able to sock away a nice chunk of change – the average balance in a TFSA account is about $27,000. Despite this, there still seems to be quite a bit of confusion over the incentives and the rules for funding the account. We’re going to try to clear it up!

Tax free savings accounts are approaching widespread usage among Canadians, with 69 percent of the 18-plus population now using a TFSA account.

TFSA contributions are not deductible but they do have tax benefits

While contributions to your RRSP can be deducted from your income come tax time, your TFSA account contributions cannot. However, the magic of the TFSA lies in the fact that the interest and investment income generated isn’t taxed upon withdrawal, as a traditional investment would be. This allows for your account earnings to compound at a much faster rate than if you had to pay tax on them each year.

TFSA funds can be used for anything

While many use the account as a way to save for retirement, there is no restriction on the purpose of the funds. RRSPs of course are savings dedicated to retirement – using them for any other purpose will result in fees. While RRSPs have great tax benefits, the idea of tying up money for decades is frightening for some people. And this is exactly why the TFSA should be used in cases where you might need the money in the short to mid-term. Use it to save for a home renovation, or a child’s wedding, or that dream vacation. Anything goes!

They’ve upped the limit

In 2019, Canadians will be able to take advantage of a $6,000 contribution limit, a $500 increase from the 2018 limit. Be careful about going over the limits though, doing so will result in a penalty of one percent per month on the contribution amount over the limit.

You can go back in time

Seriously! If you are one of the 31 percent of Canadians who haven’t opened a TFSA account, you have a lot of catching up to. That’s right, “catch-up contributions” are allowed with the TFSA. Since the TFSA was introduced in 2009, you’d be eligible for up to $57,500 in contribution room. The only caveats are that you have to have been over 18 and a resident of Canada during the period of missed contributions.

It’s really not that complicated

Maybe you don’t know where to start, or maybe you hadn’t even heard of a TSFA account until now. It’s not too late, and it’s not too difficult. But you do need to get started! Step one is to open an account. Nearly all Canadian banks offer TFSA accounts and opening an account is a relatively simple and painless process. Most also give you the ability to set up regular, automatic contributions so you don’t have to worry about remembering to fund it each year. Take a look at your income and your budget and determine how much you can comfortably contribute each month and put the rest on auto-pilot!

The TFSA account is one of many perks of being a Canadian, so be sure that you’re taking advantage!

aha insurance is Canada’s first car and home insurance brokerage to offer a fully online customer experience. Customers can purchase and manage their car and home insurance online in minutes from the convenience of wherever they are. This puts customers in complete control, and control feels great.