A Tax-Free Savings Account (TFSA) is a powerful tool to help you reach your financial goals. However, are you maximizing its potential? Here are some common mistakes to avoid so you can get the most out of your TFSA.
The TFSA was introduced by the federal government in 2009, and it has become increasingly popular. By the end of 2020, 16 million Canadians had opened at least one TFSA, according to Statistics Canada.
It’s no wonder why: TFSAs are incredibly flexible. You can contribute anytime, up to a yearly maximum, and withdraw funds whenever you need (though there are re-contribution rules). Best of all, any investment growth within your TFSA is tax-free.
Whether you’re saving for a home, your children’s education, a dream project, or retirement, a TFSA can be a valuable resource—and you won’t be taxed when you take the money out either.
What’s the Maximum TFSA Contribution for You?
For 2024, the maximum TFSA contribution is $7,000. Additionally, you can carry forward any unused contribution room from previous years.
Got more questions about your TFSA contributions? Visit Finance with Yomi for more insights on how to make the most of your savings.
Despite its flexibility, some common pitfalls can reduce the effectiveness of your TFSA. Here are four key mistakes to avoid:
1. Over-Contributing to Your TFSA
It’s easy to exceed your TFSA limit, especially if you withdraw and re-contribute in the same year. Remember, each January 1, you receive more contribution room, and any withdrawals from the previous year are added back to your limit.
The penalty? The Canada Revenue Agency (CRA) charges 1% per month for any amount exceeding your TFSA limit until it’s withdrawn.
2. Using a TFSA as a Cash-Only Account
Although it’s called a “savings account,” a TFSA isn’t designed for holding cash alone. If you only keep cash in your TFSA, you may miss out on tax-free growth from higher-return investments. To maximize your tax savings, consider exploring investment options that could grow your money over time.
Let Talk about investment opportunities to better utilize your TFSA.
3. Withdrawing to Transfer Between TFSAs
Switching financial institutions? Be cautious with your TFSA. If you withdraw funds and deposit them into a new TFSA in the same year, that deposit counts as a fresh contribution, which could trigger an over-contribution penalty.
Instead, ask your new financial institution to transfer the funds directly to avoid this issue.
4. Missing Out by Not Opening a TFSA
Some believe that if they didn’t open a TFSA in 2009, they’ve lost their contribution room. This is false—you only missed the potential investment growth. Your unused contribution room has still been accumulating.
Even if you’ve never opened a TFSA, it’s not too late to start benefiting from tax-free growth and flexible withdrawals. TFSAs work well alongside other tools like RRSPs to help build your financial future.
Avoid these mistakes and make the most of your TFSA! For more expert advice and tips on managing your finances, visit Finance with Yomi and start securing your financial future today.