It’s tax season again and that can only mean one thing: millions of Canadians are scrambling to make last-minute contributions to their Registered Retirement Savings Plan (RRSP) for tax purposes. During this season, finance experts discuss the alluring benefits of RRSPs and how and why individuals must pour their money into them, but what about Tax-Free Savings Accounts (TFSAs)?
The concept behind TFSAs was introduced by Canadian Finance Minister Jim Flaherty in the 2008 federal budget. TFSAs officially came into effect on Jan 1st, 2009 and savers and investors were permitted to deposit up to $5,000 tax-free – that limit was later increased to $5,500 in 2013. It would appear to be a very attractive investment hub for depositors.
However, many are still not flocking to their respective financial institutions, to open up an account. According to an ING Direct survey of 1,511 respondents last month, more than half of Canadians (53 percent), have yet to establish a TFSA and 42 percent of them, have no plans to open one this year.
Some of the primary reasons as to why Canadians are not opening an account, or contributing to one consist of:
- Insufficient funds to contribute
- Not understanding how TFSAs work
- Unaware of the annual contribution limit
“In addition to not paying tax on earnings on TFSA investments, another benefit is the flexibility of a Tax-Free Savings Account – no penalties for withdrawing money and the ability to carry over unused contributions - which makes it a great way to save for both short-term and long-term goals," said Silvio Stroescu, Head of Investments and Savings at ING DIRECT, in a statement. "For Canadians finding it difficult to start saving, a TFSA is a great option since there is no minimum contribution required and you can begin saving in small, regular increments."
It should be noted that a paucity of disposable income for savings purposes can also be found in RRSPs. Two studies from the Bank of Montreal (BMO) and Scotiabank reported that fewer Canadians are planning to deposit money into their RRSPs because they simply cannot afford it.
At a time when the economy is unsound, the cost of living increases, wages remain stagnant and retirement seems to be unattainable, it’s absolutely important to save money, whether it’s a small amount or a hefty lump-sum at a certain time of the year. Tiny increments can go a long way.
Looking to take control of your money by investing in a TFSA? Here are five TFSA lessons and suggestions to employ immediately, to save for your retirement, home purchase, or a child’s post-secondary education.
Financial Organization & Budgeting
Sitting down to organize your finances is the first step to financial prudence and responsibility. By studying how much you make, spend and save, you will be able to establish a successful budget and determine how you can increase your weekly, monthly, or annual savings deposits.
Here are some simple tips to prioritize your budget:
- Determine essential expenses (rent, utilities, groceries)
- Maintain a reasonable budget
- Establish an emergency fund
- Track your budget regularly
- Cut back on non-essentials
Procrastination is the antithesis to saving early. Don’t procrastinate. Save as early and as much as you can. Instead of postponing any TFSA contributions to later in the year, do it now and get it over and done with. Remember, the sooner you contribute the sooner you’ll experience the tax-free compounding interest.
Also, if you’ve already maxed out your contributions, set aside a little bit of funds for next year.
Whether it’s consolidating your debt (loans, credit cards and car payments), or making regular payments to diminish your liabilities, it’s important to reduce your debt. By shrinking the burden of debts, those funds can be allocated to a TFSA. You’ll be able to make your money work for you.
“Although dieting is never easy, by taking a glance in the mirror at your borrowing habits and your debt load - and pledging to trim a few notches off your ‘borrowing beltline’ - you’ll greatly raise your chances of a fit and enjoyable retirement,” Sun Life Financial wrote in its “Shed those extra pounds of debt for a healthy retirement” report.
Automatic Savings Plans
Speak with a financial representative at your bank and seek help to create an automatic savings plan. If you don’t earn a lot of money, start off with a small sum of money, say $25 per month. This will grow to $300 plus interest by the end of the year and you won’t even notice it’s gone from your checking account.
Since it’s tax season, you could be receiving a refund in the mail. Instead of spending it all at the local shopping mall, pay down your debts or deposit it into a TFSA. The same can be applied to any monthly or quarterly tax credits that Canadians across the country receive, such as the Ontario Trillium Benefit (OTB), GST/HST credit, or the Canada child tax benefit.
In the end, if you need any additional assistance keeping track of your finances, be sure to utilize the many tools offered by the major Canadian financial institutions. These are important programs to assist in your plight to household fiscal responsibility.
- Budgeting & Saving Solutions | Royal Bank of Canada
- Personal Cash Flow Calculator | TD Canada Trust
- Budget Planner Calculator | ING Direct
- Budget Calculator | CIBC
- Monthly Budget Calculator | Bank of Montreal
Is saving more money on your priority list this year? Share your concerns, suggestions and ideas in the comment section.