Living in this recession-battered age, many of us are eschewing concepts like “shop-til-you-drop” and “retail therapy” in favour of less sexy but more prudent principles like paying down debt and “saving for a rainy day.”
If you’re feeling pretty pleased with yourself for getting your consumer debt under control, you might want to consider opening up a tax-free savings account (or TFSA). Before the TFSA was introduced to Canada in 2009, saving for your future was all about RRSPs: sock away some money for retirement and get a tax deduction — your basic win-win. But what about those of us who are eager to save but don’t necessarily want to keep our funds locked up until we’re 65? Enter the TFSA, which has a great deal to offer.
First, the basics: Canadians aged 18 and over can contribute up to $5,000 per year to a TFSA. Any unused contribution room is carried forward to the next year. You can withdraw some (or all) of the money, at any time, for any reason, without paying any tax on that withdrawal. If you do take out money, you can recontribute that amount the following year, in addition to the $5,000 maximum. (According to the government, the $5,000 limit will be adjusted for inflation in the future.) This “carry-forward” feature goes on indefinitely.
You might be wondering if you’re really going to accrue enough interest for it to matter. For example, if you deposit $5,000 and earn 2 per cent, you’ll only be making $100 in interest. If you assume a tax rate of 45 per cent, you’d only be saving $45 per year — not exactly a cash windfall. Still TFSAs allow you to hold a range of investments, like GICs, stocks, bonds and mutual funds, which could yield significantly higher returns. Over the years, the numbers are bound to add up.
TD Canada Trust offers a TFSA Savings Calculator to illustrate the potential benefits. As the site suggests, a monthly contribution of $200, with a 6.25 per cent rate of return (optimistic, no?) when the investor (you) has an annual income of $80,000 will net a tax savings of $16,999. Sounds good, sure. But any savings calculator should be taken with a grain of salt: it doesn’t account for factors like inflation or changes in the tax rate.
Perhaps most importantly, your TFSA is a handy spot to park some funds before they get spent. Doing a direct deposit of $100 or $200 (or more) each month won’t feel horrifically painful, but it will get you closer to your goals. I don’t know if the following count as my official goals, but here are two things that I think about sometimes: Wouldn’t it be cool to buy a new car, all money down? Take the $20k you’ve put away for four years and just walk away from the dealership, free and clear. Or what about taking a trip abroad and not being one cent in debt at the end of it? Suh-weet.
A few things to keep in mind: You can be penalized for over-contributing to your TFSA, holding non-qualified investments in TFSAs and also for “swapping” investments between your TFSA and any registered or non-registered account (e.g. you swap cash in your TFSA for an investment from your RRSP so that you can withdraw those assets tax-free — sneaky sneaky). Still, if you’re looking for an incentive to save funds while paying less tax, the TFSA seems like a pretty rad vehicle.
Shelley White is a Canadian freelance writer, editor and TV producer who contributes regularly to The Globe and Mail, The Huffington Post, The Grid and Spinner.com. Shelley is also a mother of two who aspires to never again carry a credit card balance.