Tax Free Savings Accounts (TFSA) have been around since 2009 yet many people still don’t quite get how they work. The Canadian Revenue Agency does a good job explaining tax free savings accounts on their website, so I’m going to focus on answering some common TFSA questions that new grads have.
When should I open up a tax free savings account?
As soon you can! You can legally set up your TFSA at the age of 18 and I would recommend doing so right away. You might not have a lot of money at to put aside at 18 but the idea is to take advantage of this awesome account.
Should my consumer debt be paid off first?
Most credit cards charge 20% or more interest, so yes, paying off your consumer debt is a priority. That being said, don’t forget about putting away some money for your emergency fund needs to be done also. Saving for retirement shouldn’t be ignored but it can be next to impossible if you’re paying off high interest debts.
Should I wait until I have a full time job before setting up a TFSA?
Nah, set one up immediately! Again your income might be minimal when working part time but establishing good saving habits early should be a priority. The last thing you want is to be one of those people who keeps saying you’ll do it later. If not now, when?
Besides a savings account what are my TFSA options?
It’s true a majority of Canadians are using their TFSA strictly as a savings account; it doesn’t help that the name tax free SAVINGS ACCOUNT leads people to believe this is all you can invest in. TFSAs are a savings vehicle which means you can invest any asset inside; your TFSA options include stocks, mutual funds, real estate income trusts, bonds, GICs, and much more.
What’s the easiest way to set up a TFSA, does it take long?
Setting up your TFSA should only take a few mins at your local or online bank, but if you want the account to really work for you, then set yours up at a brokerage. Having your TFSA set up at a brokerage (online or bricks and mortar) will allow you to invest in any asset which I mentioned above.
How about RRSPs? Is there any advantage over TFSAs ?
To keep things simple both accounts have their advantages. TFSAs give us a tax break in the future, whereas RRSPs give us a tax break immediately. Many are drawn towards RRSPs since they like getting a refund every year but I personally favor TFSAs due to the long term benefits. There is no right or wrong choice, investing in both is ideal, but I understand that’s not possible for everyone.