As the clock struck midnight on January 1st, we celebrated the hopes we hold for 2022! In the realm of the personal, familial, and especially financial, there are many goals to look forward to this year. In this week’s blog post, we teach you about a fantastic Canadian investment account, the Tax-Free Savings Account (TFSA). We’ll see how it works, who could benefit from using it, and how to set one up for yourself to put your money to work in a responsible way.

Advantages of the TFSA

The TFSA is a registered Canadian investment account – it has special tax benefits not associated with other accounts. The main features are that all growth in this account is tax-sheltered and that all amounts withdrawn from this account are tax-free. As an example, a 20-year-old Canadian could contribute $25 a week to their TFSA, earning tax-free growth from their desired investment and when wanting to withdraw funds to, say, purchase their first house at 30 years old, they can withdraw all funds in their account tax-free.

How Does it Work?

I often ask those in our education sessions the question: What do you think is the average rate of return of a TFSA? Many people are quick to respond, “about 3%,” “maybe 1%,” “probably around 0.5%.” This is a common misunderstanding of investment accounts – the amount of growth in your account depends on the investment inside the account, not the account itself.Imagine this, an investment account is an empty box. If you put cash into an empty box, does it grow? I’d say that most of you would reply no (for those thinking otherwise, you’re incredibly optimistic). Money in an empty box does not grow. However, when this empty box, this container, is paired with an investment (stocks, bonds, mutual funds, etc.) this allows the money to start fluctuating and generating growth. So in sum, for money to grow, Canadians need to select a desired investment that they would like inside their account.Banks often promote TFSAs which boast a rate of return similar to 1%, and this is not the TFSA’s fault but rather the investment’s. Individuals I speak with often report low levels of growth in their TFSA because of this misunderstanding, which is taken advantage of by larger banks. If clients have their sights set on goals in the distant future (say 7+ years), we aid them in selecting investments that aim to maximize their growth, rather than keeping a TFSA that operates similarly to a savings account, earning them next to nothing. An account and an investment are two separate ideas, and when both are paired together, this results in your money working for you.

Who Can Open a TFSA?

Any Canadian over the age of majority in their respective province (i.e., 19 years old in BC) can open a TFSA for themselves. For those younger than the age of majority, though they cannot open a TFSA, there are still ways in which they can participate in investment. Reach out to one of our advisors to ask about these opportunities.

How Do I Open a TFSA?

Opening a TFSA is straightforward. Recently, self-directed investment apps have granted Canadians the ability to open a TFSA independently and further invest independently. While ideal for the expert stock trader, self-directed accounts may not be suited for those in other areas of work, for those with less time or energy to dedicate to market analysis, and those wanting the utmost ease with the investment process.Individuals can meet with advisors at banks, with whom they can open their own TFSA. If not a self-directed account, a bank advisor will communicate which investments they recommend to you and why. Though this information may or may not be effectively relayed, most bank advisors are greatly limited to the investments they can offer you. Most bank advisors can only offer you their specific company’s products. This restricts your freedom of choice and may blind you from the reality of other, perhaps better, options.Finally, those wanting to open a TFSA can do so by meeting with a financial professional who is contracted with a dealership or brokerage. Advisors in these domains can assist in opening a TFSA for you and can offer a multitude of appropriate investments from a variety of institutions. This allows for the utmost freedom in the investment process and connects you with options that may be truly most beneficial for you and your family. Via our partnership with Sentinel Financial Management Corp., advisors at Skyward Financial are able to offer some of the best investments from a myriad of companies across North America. In sum, these financial professionals can help you enact the freedom of choice you deserve.

How Much Can I Contribute?

Your TFSA contribution room begins to accumulate starting the year you turned 18 years old – or if you have immigrated, the year you landed in Canada. If you were 18 or older in 2009, that is the year your TFSA contribution room started to grow. Further, every calendar year, all Canadians receive an increase to how much they can contribute to their TFSA. In 2019, 2020, 2021, and now in 2022, each year Canadians can contribute a further $6,000 to their TFSA!It’s important to know that if you do not contribute to your TFSA in a certain year, you do not lose that room. Any unused room carries forward to future years. For example, a young Canadian turns 18 years old in 2019, but waits until 2022 to open their TFSA. In 2022, they would have a total contribution limit of $24,000 (2019: $6,000; 2020: $6,000; 2021: $6,000; 2022: $6,000). They are free to contribute the complete $24,000 or contribute much less; the choice is up to them. Their TFSA contribution room will further increase in 2023, 2024, and so on.

How Much Can I Withdraw?

The TFSA itself does not have any limits on when or how much you can withdraw! This makes it a flexible account to use for short-term goals as well as medium-/long-term wishes.However, specific investments that advisors recommend may “lock-in” your money for a certain period and if you withdraw, you may be charged substantial penalties. Often the case with commission-based advisors, there are incentives for them to select funds with these “locking-in” features. Common features are DSC (Deferred Sales Charge; in which fees are charged if withdrawals occur before 5-7 years) or LSC/LL (Low Sales Charge/Low Load; penalties occur if withdrawals occur before 2-3 years). Many Canadians have been charged numerous of these fees largely because they were unaware of this fact. If you are unsure if this applies to you, do your research before withdrawing funds.But at Skyward Financial, we offer investments to clients that allow them to withdraw their money at anytime. These are known as F-series funds, and we strongly believe this offers the most benefit to Canadians. Because of this, at any time, our clients are free to withdraw their funds, further giving them the freedom that they deserve. These funds also allow for clients’ investments to grow greater than other options as smaller fees are charged overall. Our advisors at Skyward Financial understand the advantage of F-series funds, as saving you money and facilitating your freedom are central tenants to our practice. Contact us if you’re interested in understanding your current investments or are wanting to get started.

No Time Like The Present

This week we’ve highlighted the characteristics of the TFSA. This account should be paired with an investment to start growing your money. Contribution room starts accumulating at age 18, date of landing in Canada, or 2009 for those 18 or older at that date. You can contribute more to your TFSA every year. Your contribution room carries forward to future years. And you can withdraw your funds at anytime, just consult a trusted advisor to understand if there are any fees associated with the withdrawal.2022 is freshly upon us, and there’s an extra $6,000 of room in store for you! Book a free meeting with us today to get one step closer to your major goals. We look forward to speaking with you soon!

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