Money & Career

4 ways to make the most of your TFSA

4 ways to make the most of your TFSA

© Arcurs Image by: © Arcurs Author: Canadian Living

Money & Career

4 ways to make the most of your TFSA

It's been three years since the tax-free savings account (TFSA) was introduced and a lot of Canadians have taken advantage of this new investment vehicle. Like an RRSP, money that's made in the account grows tax-free, but unlike the more popular savings account, you can withdraw that cash without having to cough up a dime to the Canada Revenue Agency.

The TFSA has a lot of good uses other than merely being a place to stash cash. Here are four ways to make the most of your TFSA:

1. Short-term savings

A TFSA is great for short-term savings. Since you're not taxed when you withdraw your money, you can pull out your cash at any time without worry. That can cause problems -- it's easy to spend that money -- but it's a great way to save for a big purchase like a house or car. Save money and let it grow, then easily take it out after a few years for a down payment.

2. Use it as a new retirement tool

Some financial advisers are now suggesting clients use the TFSA instead of the RRSP for their retirement savings. An RRSP only works if you end up in a lower tax bracket in retirement than when you were working.

These days, many people continue to work into their 70s or have saved so much that their RRSP money will be taxed at the highest rate. If you think you'll be in a high tax bracket when you retire, use the TFSA. There is one catch: Room accumulates by only $5,000 a year; the maximum RRSP room per year is a lot more.

Page 1 of 2 -- Find out how a TFSA comes in handy in case of an emergency on page 2.3. Add your fixed-income

Money derived from bonds is taxed as if it were income. So, if you're in the highest tax bracket in Ontario, you'll have to pay 46 percent on fixed-income earnings. Since nothing in a TFSA is taxed, if you hold bonds in the account you'll be able to keep all that dough. Stock dividend payments get a preferential tax treatment, so, generally, you don't want to hold those investments in a TFSA.

4. In case of emergency

It's wise to have an emergency fund; you never know what may happen that will prevent you from earning money.

But rather than putting dollars in a low-interest savings account, keep it in a TFSA. You don't have to invest in anything risky, but it gives you more options.

Consider owning some high-grade corporate bonds -- you'll get a bit of an income boost and won't have to pay tax on those earnings. Easily pull the money out if you need it.

These are some of the best uses of the tax-free savings account now, but as money and room accumulates, you can be sure that people will find even more ways to take advantage of the TFSA.

Page 2 of 2


Share X
Money & Career

4 ways to make the most of your TFSA