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Are you wondering whether you need a TFSA (tax-free savings account)? Or you already have one, but aren’t sure you’re taking full advantage of it? You’re not alone.
It’s common knowledge that you can have an RRSP for retirement and an RESP for your kids’ education. But where does a TFSA figure into the mix?
Despite the name, a TFSA is more like an investment account than a savings account. It earns interest and allows you to contribute a certain amount of money each year (up to $6,000 in 2019). TFSAs are super-flexible as there are no taxes on withdrawals, and there’s no limit to how much you can withdraw at one time.
For these reasons, TFSAs are a good choice for short-term, medium-term or long-term goals.
Here are five things parents can do with a TFSA.
1. Prepare for the unexpected.
Everyone can benefit from an emergency fund. But it’s especially important for parents to have a contingency plan for unexpected expenses. TFSAs are a smart place to park that 3 to 6 months of emergency expenses experts recommend having on hand. Your money is always accessible to withdraw, tax-free. And it’s also earning interest if you don’t use it. If you take money out of your TFSA, you’ll get that same amount of contribution room back next year.
2. Save more for your kids’ education.
RESPs make a lot of sense. If possible, take advantage of the full $7,200 you can get through the Canada Education Savings Grant. But, once you’ve received the government grant, save additional funds in a TFSA. A TFSA is more flexible than an RESP, so you can use it to fund non-school-related costs or accumulate funds to support your child if they don’t continue with their education.
3. Help your kids with big purchases.
It could be their first car, house, a wedding or a backpacking trip around the world. The sky’s the limit. Contributing to a milestone in your kid’s life is an amazing gift to be able to give.
4. Rely less on your kids in old age.
It’s official. The “sandwich generation” is growing as more adults face the financial burden of caring for elderly parents and young children. Take some of that pressure off your kids by maximizing your own old-age funds.
But why not use an RRSP? First, you can only contribute to them until the end of the calendar year in which you turn 71. You can contribute to a TFSA (up to the annual limit) for your entire life. Also, TFSA withdrawals aren’t taxed and they’re not considered income like RRSP and RRIF withdrawals are. So, they won’t count against your Old Age Security (OAS) or Guaranteed Income Supplement (GIS) if you withdraw amounts above the government’s annual thresholds. Read more about TFSAs vs. RRSPs.
5. Whatever you do, avoid just stashing cash.
Many people don’t realize that a TFSA is an investment account (again, the name doesn’t help) and not just a place to park cash, earning the standard 1%–2% interest. A TFSA can hold the same types of investments as an RRSP: stocks, bonds, ETFs and mutual funds. By holding investments in a TFSA, you can maximize its potential and earn significantly more.
Final Thoughts on TFSAs
TFSA suggestions aren’t the same for everyone. Expert advice on how (and whether) to use a TFSA varies based on how much debt you’re carrying, other investments you have and whether your income is high, low, or variable.
If you’re not sure what makes sense, talk to a financial advisor about the best options for you and your family.