Young Professional Savings Tip: Consider a Tax-Free Savings Account

Video courtesy of YouTube and Scotiabank 

With the new year upon us, now is a great time to check your Tax-Free Savings Account (TFSA) balance and examine if you've utilized your annual contribution room of $5000. No funds to add? No sweat: unused contribution room can be utilized in future years. The sooner you use your contribution room, the more your TFSA can work for you. Just remember that if you've made any withdrawals from your account(s), you cannot replenish this contribution room until the year following that in which the withdrawal occurred.

If you don't already have a TFSA and want to learn more, check out the above video (happens to be from Scotiabank, although you can setup a TFSA through most banks). I think it does a great job of explaining the basics and any financial advisor would be happy to assist with specific questions. It's really important to be familiar with the "rules" so that you don't contribute too much in a calendar year and wind up paying a penalty. To learn about the rules governing TFSA contributions and withdrawals, speak with a financial advisor and/or consult your bank's website as well as that of the Government of Canada.

A few cool things I've learned about TFSAs:

1. If you turned 18 prior to 2009, you've accumulated $5000 of contribution room each year since 2009. You didn't need to open a TFSA in order to accumulate this contribution room. If you turned 18 in 2009 or 2010, you accumulated contribution room from the year you turned 18 onwards.

2. You can hold more than one TFSA account at a time but it is up to you to ensure that your total contributions do not exceed your contribution room so as to avoid receiving a penalty. You can use this opportunity to take advantage of higher interest rates at one financial institution without withdrawing funds from an existing TFSA at another (which could impact your contribution room in a given year). While it is possible to transfer TFSA funds from an account at one institution to another, it can come with an undesirable transfer fee. You might examine how a late-December withdrawal from an existing TFSA account followed by an early-January deposit to a new TFSA account could help you avoid the transfer fee.

3. Whenever possible, take advantage of new TFSA contribution room as soon as you receive it (January 1st of each year). Doing so will help you maximize the amount of interest you can earn over time.

4. TFSAs can be a good home for your tax return. If you are making RRSP contributions, you might consider the domino effect when planning for your TFSA:
- How much of a tax refund are you expecting to receive?
- How does this refund amount compare to your contribution room?
- Assuming the tax return will be coming in a few months, what can you contribute to your TFSA in January?

Again, I am not a pro at TFSAs nor do I claim to be. It can be a really helpful savings tool and not enough young professionals know about it hence why I thought it would make a good topic for a blog post. Have questions? Connect with your bank or a financial advisor. You will be on your way before you know it!