New Year, New TFSA Contribution Room

Doesn’t everyone know what the TFSA is yet? Apparently not.

I’m surprised when I meet people who don’t yet have – or even know about – Tax Free Savings Accounts. Have you been living under a rock? With a new year around the corner, this is a good time to think about opening up a TFSA. And if you’re not maxing out your TFSA, you should make doing so one of your new years resolutions. Why? Well, here are five good reasons:

1. Earn tax-free income. This is the only way to earn tax-free income on your money no ifs, ands or buts. It’s dead simple too. Stick your money in a TFSA, earn a return, pay no tax on that income. What’s to figure out?

2. Growth is slow and steady. Sure $5,000 this year may not seem like a lot  but over time small contributions really add up. Put away $5,000 a year for 20 years, paying no tax on your 4% return, and you’ll end up with $151,839, $13,000 more than if you were being taxed on your return, assuming you make between $40,000 and $80,000 a year. Higher incomes mean bigger savings. So do higher contributions, since now you can contribute up to $5,500 a year.

3. Choose from a variety of investments. Sure, it’s called a “savings” account, but that’s referring to what you do with it, not because you have to settle for “savings” rates. You can buy anything in your TFSA that you can buy in an RRSP, so you can aim higher in terms of return if you’ve a mind – and a risk tolerance profile – to earn more.

4. Catch up missed contributions. If this is the first time you’re hearing about TFSA, you haven’t missed the boat. And if $5,500 seems like a fortune you can’t come up with, don’t sweat it. You can carry forward your unused contribution room and catch up down the road.

5. Benefit from flexibility. If you’ve been holding off because you’re not sure if you may need the money later, don’t let that stop you from contributing. Sure, it would work against you in an RRSP, but needing to get at your money is no problem in a TFSA. You can take the money out whenever you need it, and then put it back the NEXT calendar year.

6. It won’t mess with your future taxes. Unlike RRSP or RRIF income that is taxable down the road, your TFSA is always tax-free. So money you take from the plan won’t affect government benefits or tax credits down the road.

7.  It’s a great supplement to a pension plan. Want a way to put aside a little extra for retirement without worrying about the amount of extra tax you’ll have to pay? The TFSA was made for you. Save to your heart’s content (up to the annual limit) and you can move into retirement without having to worry about all the extra tax you’ll have to pay when you tap your savings.

Tax Free Savings Accounts are fabulous! You should have one. So should your partner. And all your children over the age of 18. So should your mother and brother and best friend. Spread the word. All that money sitting in taxable savings account should be shuffled into a TFSA lickety-split. Hey, the government’s giving you a perfectly legal way of screwing them out of taxes. Take it!

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