I’m not going to lie, when I first opened a TFSA (Tax Free Savings Account) around four years ago, I really didn’t understand why. I was taking the advice of my family advisor, and while he tried to explain how the account worked, I was not fully grasping it.
So I went home and did some research.
I read up on TFSAs, and quickly discovered a few facts that helped me understand the account more clearly and how it will benefit me in the long run:
A TFSA (Tax Free Savings Account) is a government program, like an RRSP or RESP (or anything else that start with “R”). A TFSA is an account that’s registered with the CRA (Canada Revenue Agency) and has specific tax properties; it’s not a type of investment product but rather an investment account where you can put pretty much any investment you want in it – such as GICs, stocks, bonds, and mutual funds.
But unlike an RRSP, with a TFSA you don’t get a tax refund when you contribute. The key benefit of a TFSA is the fact that all the growth and interest grow completely tax free and you can withdraw funds from your TFSA anytime you wish completely tax free.
With an RRSP you do get a refund of income taxes you paid off your paycheque, and the investments you put into it grow tax deferred not tax free. That means when I go to take money out of my RRSP, I will have to pay income taxes on the whole amount I take out, not just the part that grew.
You can contribute up to $5,500 a year to a TFSA; however, the good news is, if you didn’t max out your limit in previous years dating back to 2009 when the TFSA started, you can accumulate unused contribution room and use it in future years. This means if you were over 18 in 2009 and never opened a TFSA, your contribution limit would be $46,500. Next to owning a home, a TFSA accumulates value completely tax free and can be sold completely tax free just like our home.
My husband and I believe the TFSA was the best thing the government ever did for our generation and we will use our TFSA as a way to save for our children’s education and our tax free retirement. What I’d like to know is can I open a TFSA for my two-year-old daughter? If not, then why?
My husband and I are both part of the GIG economy. We earn our living jumping from one gig to another and hope it’s not like that for our kids. My question is if I can’t open a TFSA for my two-year-old, should I be investing the tax-free money I receive from the new Canada Child Benefit into my TFSA or is there another solution for my child’s future that will have the same benefits for her as the TFSA for us?
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This post is part of the Diary of a Millennial Parent series. Every other week, I’ll write about my experiences as a millennial parent trying to make sense of this financial maze and what’s the best way through. Be sure to check back to the answers to my questions, which will be offered in a follow up post by Michael Lampel, President and Founder of insuranceforchildren.ca, Canada’s leading provider of financial planning for children and creator of Child Plan.