World

Investment Tip: How to Get the Most Out of Your TFSA

The Tax Free Savings Account (TFSA) is a great tool for Canadians to save and invest money.

This is a hugely popular account, and there are more than 15.3 million TFSA holders in Canada as of 2019, according to the Canada Revenue Agency (CRA).

Here are eight tips for getting the most out of your TFSA:

1. INVEST IN YOUR TFSA

Because the TFSA contains the word “savings account,” many Canadians think that all you can do is save in one account, when in reality the account is much more flexible. Your TFSA may also hold a variety of investments, including stocks, bonds, ETFs, mutual funds, etc.

You can invest in your TFSA in several ways:

  1. All the major banks will have a TFSA account that you can open and keep your investment in by simply calling them or going to the bank branch, but this can be an expensive option with fees. high because they often try to convince you to invest in mutual funds.
  2. A cheaper way is to consider investing in TFSA using a robotics advisor. Your portfolio will be selected for you based on your risk tolerance and goals.
  3. If you really want to save on fees, the best way is to open a TFSA and invest yourself directly using a discount broker, but that requires the most investment knowledge.

Investing is where the real power of the TFSA is unleashed because if you invest tax-free over a long period of time, you have the potential to earn a much higher return than if you just saved the money in the account. It is important to choose investments that match your risk tolerance and investment goals.

Remember that investing in a TFSA is risky and there is a chance that your investments may suffer losses, especially in the short term.

If you insist on only using your TFSA for savings, keep in mind that some banks have much higher rates than others, so browse around to find the best rates.

2. REGULAR CONTRIBUTIONS

You can contribute up to $6,500 per year (as of 2023) to your TFSA.

If you haven’t used your TFSA contribution room from previous years, you can still contribute to catch up.

If you’ve never contributed to a TFSA before, you can contribute up to $88,000 if eligible to receive the full amount in 2023.

Donate regularly to take advantage of the full contribution limit and to increase your investment or savings over time.

3. USE YOUR TFSA FOR LONG TERM GOALS

The TFSA is a great vehicle for achieving long-term financial goals because all investment income and capital gains earned in your account are tax-free.

Consider using your TFSA to save for important long-term goals like retirement.

4. NO WITHDRAWAL WHEN UNNEWED

Avoid withdrawing from your TFSA unless absolutely necessary.

Every time you withdraw, you lose the ability to contribute for that year, which means you can’t contribute that amount again until next year without penalty.

You also lose out on the real magic of the TFSA, which is that if you keep your investments inside it long enough, the tax-free compounding effect can give you huge returns over time.

Note that the penalty only applies if you’re close to reaching your TFSA total contribution limit. If you’re not near that limit, this probably won’t affect you.

Here are a few examples of how it works:

  1. Let’s say you have a TFSA limit of $88,000, and you’ve contributed up to that amount. If you withdraw $10,000 from your TFSA, you won’t be able to contribute it again until January of next year without penalty.
  2. Let’s say you have a TFSA limit of $88,000, but you’ve only used up $50,000 of that limit. If you withdraw $10,000 from your TFSA, you can still contribute up to $38,000 ($88,000 minus $50,000) that year with no penalty.

5. AVOID OVER PAYMENTS

Contributing excessively to your TFSA may result in penalties from the CRA. The current penalty for over-contributing to the TFSA is 1% per month of the excess amount until it is withdrawn.

For example, if you over-contributed $1,000 to your TFSA, you would be fined $10 each month until the excess amount is withdrawn.

If you accidentally overcontribute, you should withdraw the excess amount as soon as possible to minimize penalty fees.

It is important to track contributions and withdrawals from your TFSA to avoid over-contributing. You can check your contribution limit by logging into your CRA account or contacting the CRA directly.

6. CONSIDER USE YOUR TFSA TO KEEP HIGH GROWTH ASSETS

If you want to invest in high-growth assets, such as small-cap stocks or emerging-market funds, consider keeping them in your TFSA.

That way, any capital gains earned won’t be taxed, allowing you to maximize your profits.

Be careful with this strategy, as high growth assets can also lose a lot of money.

7. GIVE MONEY TO YOUR Spouse INVESTED IN TFSA

There is no general TFSA in Canada. If you’ve reached your TFSA contribution limit but your spouse or common-law partner hasn’t reached it, consider giving them money to contribute to their TFSA.

This can help maximize your tax-free savings as a couple.

8. AVOID USING YOUR TFSA FOR DAY TRADING

If you use your TFSA for day trading, the CRA may consider it a business and you may be subject to tax on your trading profits.

This can be especially difficult to deal with as day trading can result in large profits or losses in a short period of time, and the taxes payable on those gains can be huge.

TFSA’s MAIN RESULTS

Remember, the key to getting the most out of your TFSA is to contribute regularly, invest and save wisely, and use it for long-term savings goals.

Also, avoid withdrawing the TFSA for as long as possible. The sooner you start contributing, the more you can take advantage of the compounding effects of the TFSA.


Christopher Liew is a CFA Charterholder and a former financial advisor. He writes personal finance tips for thousands of Canadian readers daily on his Wealth Awesome website.


Do you have any questions, tips or story ideas about personal finance? Please email us at dotcom@bellmedia.ca.



Source by [author_name]

news7h

News7h: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, Sports...at the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button
Immediate Peak