#MakeItMakeSense is a new weekly series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.
How can I pay off student loans? How can I afford to live in Toronto? Young people in Canada are struggling to get a grasp on their personal finances. Bottom line, figuring out money is hard — especially in a pandemic.
This week, our question comes in from Jaedon, 20. He asks, “Can you break down what a TFSA account is and how do they work? How is that different from other accounts?”
To #MakeItMakeSense, we brought in money expert Jessica Moorhouse to break it down and give us tips on how to approach TFSAs.
What is a TFSA and why is it beneficial?
Something people may not realize is that Tax Free Savings Accounts (TFSAs) have only been around since 2009, Moorhouse explains, adding there is often a lot of confusion around what these accounts are.
Due to the name, people often think of it as solely a savings account, which it can be used for, but Moorhouse says it can also be utilized for many other things. For example, a TFSA can be used as an investment account to grow wealth or save for goals like a down payment for a home or retirement.
TFSAs are tax efficient and don’t provide any tax deductibles. This means unlike the Registered Retirement Savings Plan (RRSP) which is often bought with the intention to lower tax bills, money in a TFSA account can still sit and grow, without being taxed.
“There’s no penalty for making withdrawals whereas there are more stipulations with an RRSP,” said Moorhouse, emphasizing the flexibility there is when it comes to contributions and withdrawals.
“So, this can be great for someone who’s just starting out that doesn’t use tax deductions, but wants to start investing (without paying tax) and grow their TFSA to a good sizable amount.”
How old do I have to be to open a TFSA? Is there a right age to open one?
Once you turn 18, you are eligible to open a TFSA. Moorhouse emphasizes to do it as soon as you can.
“Everyone gets the exact same TFSA dollar limit every year but depending on what your age is, some people will have way more (contribution) room and some people may have less,” she says.
For example, if you were age 18 or older in 2009, and never contributed any money to a TFSA, the contribution room would have still been built and compound. Today, you would have accumulated $81,500 in available contribution room, Moorhouse says.
Alternatively, if you turned 18 in 2021, you’d have $12,000 worth of room ($6,000 from 2021 and another $6,000 from 2022).
The contribution room number doesn’t mean that’s the amount you have to contribute each year but it’s for people to know how much room they have to work with. There are penalties for over contributing, so make sure to stay within your room.
There is also no cap or age limit on when you stop gaining contribution room or when you can stop making contributions.
How do I decide what the best amount is for me to contribute to a TFSA?
When it comes to deciding how much to contribute to a TFSA, Moorhouse says to first establish what the purpose of the account is, whether it be for a down payment, retirement or an emergency fund.
How much to contribute comes down to your particular goals, Moorhouse says, adding that if it’s for long-term investing for retirement, people would then have to make a budget to see what they can afford to contribute.
“You could say you wanted to invest 20 per cent of my net income for my retirement, then allocate 10 per cent for my TFSA or something like that.Start with what the account is for and then work backworks,” she said.
“There’s no right or wrong answer and at the end of the day.”
Moorhouse adds to think of the account like a container you can put multiple investments in including stocks, bonds, mutual funds and more. It’s all about figuring out what you want your container or portfolio to look like, she says.
Additional tips on TFSAs
Tip 1: To find out how much contribution room you have for a TFSA, Canadians can log into their CRA account, which is updated yearly around February or March.
“The financial institutions that you have your TFSA at have to report if you make a contribution to the CRA and that’s how they update that information in your CRA account,” said Moorhouse.
Tip 2: Moorhouse advises keeping track of TFSA contributions, such as in a spreadsheet, to have a reference point when doubtful if numbers are correct.
Tip 3: If you opened up your TFSA at an institution like TD Canada Trust for example and wish to move it over to somewhere like Wealthsimple, Moorhouse says you can set up a plan-to-plan transfer.
Got a question or scenario that you’d like to see tackled? Reach out to Madi via email madisonwong@thestar.ca and we’ll #MakeItMakeSense.
Jessica Moorhouse is an Accredited Financial Counsellor Canada®, host of the More Money Podcast and founder of financial education company MoorMoney Media Inc.