Financial Literacy: What You Should Know About the TFSA

By: Tom Drake on November 19, 2015

One of my favorite financial vehicles is the Tax-Free Savings Account (TFSA). Here in Canada, the government has made it clear that they want to make saving a priority, and the TFSA is one of the best ways to do this.

If you want to build wealth for the future, you should know about the TFSA. Here are the most interesting features of this extraordinary account:

Tax-advantaged growth

You might be surprised at the benefit you can receive from tax-advantaged investments. The TFSA offers tax-advantaged growth. You fund your TFSA with after-tax dollars, but none of your earnings are taxed when you withdraw if you meet certain requirements. This can be a good way to save money on capital gains over time.

If you think that you might be in a position to pay higher taxes down the road, either due to being in a higher bracket or just seeing an increase in taxes, you should know about the TFSA. You pay taxes on your money today, at the lower rate, and you don't have to worry about taxes on any capital gains you see in your account later.

Contribution room and "catching up"

Another great feature of the TFSA is the contribution room. If you end up withdrawing money, or if you don't contribute the maximum one year, you can make up for it by using your contribution room. This is a great way to play "catch up" if you end up with a raise one year and the ability to contribute the maximum and more.

If you aren't sure about your contribution room, you can use information from the CRA to figure it out. The annual TFSA limit has been rising in recent years, so that gives you more room to make your tax-advantaged contributions to your TFSA.

Flexibility

Finally, one of the things I love most about the TFSA is the flexibility. Many people compare the TFSA to the Roth IRA in the United States, but the reality is that the TFSA is much more flexible. You can withdraw money to use for education or to buy a home, and then put all that money back, plus any unused contribution room. You have a lot of flexibility when you use the TFSA.

Not only is there flexibility in how much you can withdraw, and when, but you also have flexibility in terms of the assets you hold. One of the things you should know about the TFSA is that you can use index funds and ETFs in your TFSA to boost your returns over time. You can keep cash and bonds in your TFSA, but you really do have other options as well.

No matter your financial goals, the TFSA can help you accomplish what you need, especially if you are willing to keep your money in the account for the long haul. As you learn about financial literacy this month, don't forget about the TFSA. It's one of the best tools out there for maximizing your money for the long haul.

Image Courtesy of Adobe Stock

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