For more than a decade, advisors and financial planners across the country have been pushing clients to open and invest in one of the greatest tax strategies Canadians have at their disposal, the Tax-Free Savings Account (TFSA). This will keep your TFSA growing in a tax-free environment. Remember to ensure that you stay within your contribution room.
A key strategy is to contribute early, so your investments have more time to grow. Make sure you’re consistently contributing to your TFSA by enabling automated deposits into your account.
Understand your TFSA contribution limit
TFSAs have a yearly contribution limit. This means you’re only allowed to contribute a certain amount of money every year. And exceeding your limit results in monthly taxation on the excess amount. That’s why it’s important to have a clear idea of your contribution limit before you begin investing in a TFSA.
Your yearly contribution room will include the amount set aside by the government and any unused contribution room from previous years. In addition, withdrawals from previous years are added back to your contribution room starting in the year following the withdrawal.
For example, the contribution limit in 2023 is $6,500. However, if your unused contribution amount from 2022 was $1,000, this amount is carried forward to 2023, giving you a total contribution limit of $7,500.
Take advantage of income splitting opportunities.
While there’s no such thing as a spousal TFSA, if you happen to be the higher income earner, you can gift money to your spouse or partner, to enable them contribute to their TFSA. Doing so would not only help you achieve family income splitting, the tax-free nature of the TFSA means that there is no impact on any spousal tax credits (that you as the higher income-earner may be able to claim for your lower income spouse). Although you wouldn’t get a tax deduction as you would with a spousal RRSP, the income earned on money invested is tax-free. Plus, you’d be ensuring that both of you are maximizing your annual contribution amounts, boosting your tax-free earning potential in the process.
CONTRIBUTE REGULARLY
You can contribute up to $6,500 per (as of 2023) to your TFSA. If you haven’t used your contribution room from previous years, you can still make contributions to catch up.
If you’ve never contributed to a TFSA before, you can contribute up to $88,000 if you’re eligible for the entire amount in 2023. Make regular contributions to take advantage of the full contribution limit and to grow your investments or savings over time.
DON’T WITHDRAW FUNDS UNNECESSARILY
Avoid withdrawing funds from your TFSA unless it’s absolutely necessary. Every time you withdraw funds, you lose the contribution room for that year, which means you might not be able to contribute that amount again until the following year without a penalty.
You also lose out on the real essence of the TFSA, which is if you hold investments inside of it for long enough, the tax-free compounding effects can potentially earn you large returns over time.
Note that the penalty is only relevant if you are close to your total TFSA contribution limit. If you aren’t near that limit, this probably won’t affect you.
Plan for the long term
Your TFSA account can be a great way to save for the future and may come in handy in several situations. In case of early retirement, for example, you may need to wait a few years before you’re eligible to receive a pension. At that time, withdrawing from your RRSP may not be the preferred approach either as withdrawals from RRSPs or Registered Retirement Income Fund (RRIFs) are taxable. In contrast, the funds in your TFSA account are received tax-free upon withdrawal. This can make a TFSA a flexible investment tool for your retirement alongside your RRSP.
Automate your TFSA contributions
Maximizing your TFSA’s potential means ensuring it’s always working for you. A key strategy is to contribute early, so your investments have more time to grow. Make sure you’re consistently contributing to your TFSA by enabling automated deposits into your account. This will keep your TFSA growing in a tax-free environment. Remember to ensure that you stay within your contribution room.
Stay Informed:
Keep yourself updated on changes to TFSA rules and contribution limits. Financial regulations may evolve, and staying informed ensures you make the most of your TFSA within the legal framework.
Remember, the TFSA is a versatile tool that can be used for various financial goals. Whether you’re saving for a major purchase, retirement, or simply building wealth, these strategies can help you maximize your benefits . Always consult with a financial advisor to tailor these strategies to your specific situation and goals.
