Blog

An Introduction To TFSAs

By Debt.ca on February 13, 2013 No Comments

You’ve probably heard about Tax-free Savings Accounts, or TFSAs, but if you’re still struggling to get out of debt, this kind of saving vehicle might be beyond the scope of your current plans.

Still, it’s important to understand what it is and how it can help you, even while you’re in debt.

Introduced in 2009, the original contribution amount limit was $5,000 per year. Starting in 2013, this limit is being raised to $5,500 to account for inflation.

Setting up one or more TFSA accounts is simple. You can set up a TFSA that’s like a regular savings account, or you can create one that holds GICs and/or mutual funds.

Regardless, the whole point of a TFSA is the TF, or Tax-free part. Money that you earn inside your TFSA grows tax-free, meaning when you withdraw it you won’t pay anything in taxes. That means if you contribute $5,000 this year and in 20 years it’s worth $16,000, you won’t pay anything in taxes on the $11,000 you earned.

Compare this to an RRSP. RRSP contributions are made with pre-tax dollars, which means you don’t pay income tax on the money you use to contribute. For example, if you make $60,000 a year and are in a 30% tax bracket (for easy math), you’ll pay $18,000 in taxes. But if you contribute $10,000 to your RRSP, you will only pay 30% on $50,000, or $15,000. So not only are you putting $10,000 in savings for your future, you’re also saving $3,000 right now on your tax bill.

The problem with RRSP’s is that when it comes time to withdraw, you’ll pay taxes on that money as if it’s income. We’ll talk in a later article about choosing which vehicle is right for you.

Back to TFSAs. Whereas RRSPs restrict when you can withdraw from them, a TFSA can be accessed at any time. Once you withdraw some or all of the money in it, you can’t put that money back in the same year, but you CAN put it back in any later year without penalty. This makes it a much better option for mid-range savings goals like saving for a down-payment on your home or starting a business.

Even better, your unused contribution room accumulates, so if you haven’t touched your TFSA room yet, you have a maximum allowance of $25,500 right now (4 years at $5,000 and 2013 at $5,500).

Two more quick points. Unlike an RRSP, the only condition you have to meet to open a TFSA is being 18 years or older. Also, contributions into a TFSA or withdrawals affect your eligibility for federal income benefits like Old Age Security, the Guaranteed Income Supplement, or the Child Tax Benefit.

We’ll talk more about TFSAs and RRSPs soon.

Debt.ca

Admin


Top Tips for First Time Home Buyers

By Rubina Ahmed-Haq on April 26, 2017

This is the busiest time for real estate transactions in Canada. If you’re out shopping for a home it’s easy to get caught up and spend more than you wanted too. For first time homebuyers it can be an overwhelming experience. Before setting out to buy your first home here are a few ways you…

How Diversifying Your Transportation Habits Can Save You Thousands

By Jordann Brown on April 17, 2017

If you grew up with two cars in your parents’ driveway, you’re not alone. Like most Canadians, the generation before us spent thousands of dollars per year maintaining their vehicles, fueling them up and paying for them through car loans. For our parents, cars were a sign of freedom, mobility, and independence. Fast forward 20…

How to Budget For Summer Holidays

By Alyssa Davies on March 29, 2017

I know what you’re thinking – summer seems way too far away to be worrying about what lies ahead. However, that is exactly why you need to start planning and prepping for any upcoming expenses. Not unlike Christmastime, summer travel and events can end up being just as costly. Wedding season rolls around, camping trips…

Which Type of Debt Should You Repay First?

By Amanda Reaume on March 23, 2017

Some people feel very anxious when they’re in debt and want to pay it off as soon as possible. But if you have a lot of debt or if you have many different types of debt, then you might be confused as to which debt you should pay off first. The first thing that you…

No Comments Leave a Comment  

Leave a Comment

Free Savings Estimate

How much do you owe?

$100,000

$5,000
$100,000
Live Chat
Welcome to our Live Chat
Agents are not available at this time. Please leave a message. Thank you.
First Name
Last Name
Phone
Email
Postal Code
Debt Amount
 
PHP Live! powered