A recent survey was conducted by CIBC that shows that although almost half of Canadians have a tax-free savings account (TFSA,) few are making contributions to it every year, and even fewer know what to do with the money in the account.
Tax-free savings accounts are just that, savings account that will allow you to save your money, but that are never taxed – meaning that you get to keep more of your money! But only if you know how to use them. The recent survey shows that we don’t.
The survey is just the latest that’s come out showing that Canadians aren’t taking full advantage of their tax-free savings accounts.
- 47% of Canadians have a TFSA
- Just over 23% however, actually made a contribution to it this year
- 41% don’t have plans for the money that’s in their TFSA
- 36% will use the money for retirement
- 30% say they’ll use it for emergency purposes
- 52% of respondents in British Columbia said that they had a TFSA, the most of any province (not shown on the chart)
- 42% of Atlantic Canadians who responded said that they had a TFSA, the least of any province (also not shown on the chart)
“You will get more out of your TFSA if you have a plan for the funds you invest in it,” said Colette Delaney, executive vice president of retail and business banking at CIBC. “These poll results suggest that some Canadians may not see the full potential of their TFSA, such as using it as part of their retirement strategy.”
And the poll also suggests that many Canadians don’t even have a TFSA and therefore are missing out on a huge opportunity every single year. If you fall into this category, first open a TFSA and then follow these tips when using it.
Contribute your tax refund
This is a strategy that many are currently using for their RRSPs, and there’s nothing saying you can’t use it on your TFSA either. If you have both a TFSA and an RRSP, split your refund up and distribute the funds evenly between the two; or just plunk it into the one that will accumulate the most (use a TSFA if you’ll need to withdraw the money any time soon.)
Use them for their intended purpose
Yes, it’s much easier to pull out a few bucks from your TFSA than it is your RRSP; but that doesn’t mean you should. The more you take out, the less money that’s there to collect interest – and that’s one of the biggest benefits of a TFSA. These accounts should only be used for long-term savings; think education, retirement, or emergency fund. Not that burger you want for lunch.
Contribute at the beginning of the year
If on January 1st you contribute $2,500 to your TFSA, at the end of 10 years you’ll have about $33,000 (at 5% interest.) If you had contributed the same amount on December 31 of the same year, you’d have about $31,000 at the end of 10 years – a difference of about $2,000! Put your money in all at once at the beginning of the year, and you’ll fully realize the potential of your TFSA. If you can’t come up with that much at one time, contribute smaller amounts at the beginning of each month. It will make a huge difference!
Hit your spouse up for a contribution
Each person can contribute $5,000 a year to their TFSA. But if you’re married or common-law, your spouse can also contribute the same amount every year – that’s $10,000 worth of savings collecting interest every single day! Combine as much cash as you can, and map out your road to retirement!
Tax-free savings accounts can be a great investment vehicle. Unfortunately, over half of Canadians don’t have one and half of those who do don’t know how to us them. Follow these tips to boost your savings and really make the most of your money. And when you want even more tips on TFSA, or any other financial matter, find us on Facebook and Like our page!
