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Tax-free advice on the TFSA

The Registered Retirement Savings Plan (RRSP) is great for long-term savings, but what if you want a short-term option as well?

The Registered Retirement Savings Plan (RRSP) is great for long-term savings, but what if you want a short-term option as well? Not to mention the ability to withdraw from it before you hit 72. Cue the Tax- Free Savings Account (TFSA) and right along with it Motive’s Assistant Manager, Pat Neitsch, to give you the inside scoop on this savvy savings strategy.

The TFSA is a flexible investment account that can help meet both your short- and long-term savings goals. It mirrors the RRSP as both can be used for long-term savings. However, you can deposit after-tax cash into a TFSA and still withdraw the money tax-free.

In other words, “the RRSP is for later in life, whereas your TFSA is for right now,” emphasizes Pat. It offers you the freedom to grow your money without having to lock it away completely. For example, should you need to dip into your savings for a vacation or something bigger like a down payment, you can. Just be sure to track your contributions and withdrawals, warns Pat, as like the RRSP, the TFSA has its limitations.

This year (2018) for instance, the contribution limit is $5,500, meaning you can contribute $5,500 now or carry forward the unused portion to next year. But be careful — many Canadians have been shocked to discover they’ve incurred monetary penalties as a result of over contribution.

Say you withdraw $5,500 from your TFSA in January 2018 but put the same amount back in June 2018. That redeposit will be considered a double payment and subject to a tax penalty of 1% per month on the amount over contributed.

Besides keeping track of your contributions and withdrawals, Pat’s biggest piece of advice for utilizing a TFSA is contributing to it regularly. “As soon as you start, you realize the benefits — even if you’re only contributing a small amount,” she reiterates. Start by taking advantage of the few dollars you normally spend on lattes each week. Minimal contributions, paired with the TFSA’s compounding power, can go a long way in a short amount of time.

The TFSA also moonlights as an investment tool because of the variety of interest bearing options available. Depending on your tolerance for risk, your plan can include everything from Guaranteed Investment Certificates (GICs) and mutual funds, to stocks and bonds and exchange-traded funds (ETFs). Just be sure to talk with your financial advisor on the best strategy for your goals and income level.

Pat emphasizes the benefit of flexible savings strategies to help you start small and grow your savings over time.