The 4 TFSA Accounts You NEED to Know
In case you haven’t heard, a TFSA is a tax free savings account introduced by the government a few years back. In a nutshell, you have to be 18 years (Ontario) and older to contribute to one and you can contribute $10,000 per year of your after tax income. You can withdraw the money any time but must wait until the next calendar year to put that money back (only if it exceeds your combined contribution limit) or else you’ll be dinged with over-contribution charges. Most people agree putting your money in a TFSA, as young investor is the smarter choice over a RRSP. You may think this is difficult for a student since you might have no source of income but you do have time on your side.
Here is what you can do with a TFSA:
TFSA as a savings account
- Most people use their TFSA’s as a high interest savings account or emergency fund of some sort. This is ok but at a rate of return of 1.2 to 2% that banks usually offer is pretty negligible, especially when inflation is around 2-3%.
TFSA as a GIC account
- A GIC is a guaranteed income certificate, whereby you put money in and it is locked in, meaning you don’t have immediate access to your money. The interest income is paid to you after you finish the term (it can be 1 year or 2 years or even 5 years). It’s a safe bet as the original amount you contribute is protected. The rates of returns are similar to a high interest savings account.
Mutual Fund TFSA
- For a mutual fund based TFSA you can have pre-authorized monthly contributions and put powerful dollar cost averaging on your side. This means that you neglect market timing (which takes the stress out of investing, though some people actually enjoy market timing and can get better returns if they employ value investing tactics). If you would rather have some help, there are many financial advisors, mutual fund advisors who can help you, though you have to be cognizant that some of the MER’s (management expense ratios) can be as high as 3.2%. However, if you wish to access your money sooner rather than later, investing with your TFSA may not be for you, because that $10,000 you put in your TFSA might be very realistically be only $7500. It’s hard to time the market and it really depends on your risk tolerance.
TFSA as a trading account
- If you consider yourself financially competent and market savvy a trading account might be the account for you. The good thing about using the TFSA as a trading account is that you don’t have to pay tax on your capital gains. However, you don’t get to use capital losses, either. HOWEVER, this is a big warning- if you think you might need this money in the near future, which is probably likely for young adults and students, investing your money can be very risky. You never know where the market might be when you need the money. You could have half of what you invested in the first place. Or vice versa. If you are willing to take that risk, then using your TFSA as an investment vehicle is for you.