A basic guide to tax-free savings accounts
By: Ganimat Kaur
The journey toward being an adult with stability in all spheres of life comes with serious responsibilities and expectations. A secured life is an ultimate goal for everyone. Of course, it includes happiness and good mental health, but managing finances and saving for the future is also a priority. Short-term savings are essential for investment in the long run. Here is a quick guide to understanding the benefits of a tax-free savings account (TFSA).
What is a TFSA?
A TFSA is a savings bank account that allows you to make secure investments without paying taxes and make tax-free withdrawals for life, under the guidelines of the Canada Revenue Agency. The interest-earning on the investment is also tax-free. The limit on how much money you can put into the TFSA is renewed and increases each year. Individuals who reach the maximum TFSA deposit limit for one year can contribute more in the upcoming year, after the contribution room increases.
To open a TFSA, an individual must be 18 years or older and have a valid social insurance number. For Canadian citizens, opening a TFSA is tax-free. Non-residents must pay one per cent tax every month until the deposits are saved in the account. (The Canada Revenue Agency grants certain exceptions, under its guidelines.)
The contribution room is the maximum limit of money that one can invest in a TFSA. The limit increases and changes every year. During a particular year, if the investment is under the capacity of the contribution room, the remaining capacity will be added to the contribution room for the new year. As a result, the individual has a higher tax-free capacity to save for the upcoming year.
How to open a TFSA
The process is similar to opening a bank account. The personal information provided must be accurate, including date of birth and address, because the information is shared with the Canada Revenue Agency. According to the CRA, one must contact the financial institution and provide them with SIN number and date of birth. You must provide at least two pieces of identification, along with additional documents as needed, when opening the account. There are various options to open TFSAs, which depend on the financial institution an individual chooses. It can include an in-person meeting at a bank, online applications and/or contacting trust and insurance companies.
Benefits of a TFSA
The term TFSA explains the most important factor of tax-free interest earnings and saving. The money can be withdrawn at any point in time. Though it works best to attain year-to-year goals, TFSAs also suffice for long-term gains such as retirement. The money saved is available throughout the year with a promise of increasing contribution room every year. It is an investment for a safe future because it keeps a person prepared for the highs and lows of life without any bounded withdrawal contract. The money in a TFSA is always available.
The investment made by the TFSA holder is transferred to the children after a person’s death. The transfer is tax-free and makes the saving valuable to the family.
The TFSA holder can also share the account with a spouse, resulting in increased contribution room and maximum profit. Because of that, it can often benefit families and children for their long-term goals, including education, housing and financial emergencies.
Every coin has two sides
The pros of TFSAs outweigh the cons. The only downside to opening a TFSA is the withdrawal limit. There is no restriction on withdrawing the invested money and, quite frankly, there is no harm in doing so. However, if you create the account for long-term goals such as retirement or building family assets, withdrawing money too early can limit the long-term payoff. The sole aim of savings is waved off with unlimited withdrawals from TFSAs. It is a subjective issue of need and circumstances.
All the financial institutions in Canada follow the mandated guideline given by the CRA. Basic information about tax-free savings accounts is available on bank websites. It’s crucial for young adults to understand the importance of investments and secured finances. Unfortunately, TFSAs don’t impact the income tax paid by an individual, but they do prepare one for potentially unfavourable times and unwelcome expenses.
Financial stress is a major concern among youth, and it impacts mental health, quality of work and personal relationships. Saving money results in reduced financial stress, with a positive outlook for long-term investments and benefits. Opening a tax-free savings account is a good way for young adults to save money and create more future assets for themselves and their families.