TFSA: four mistakes to avoid

The TFSA should be considered an account turn where the customer can raise money and the pull out without paying taxes, within the contribution limits set by the federal government.

However, it’s not always as it seems… Here are some common mistakes worth reminding clients to avoid, according to Adam Bornn.

1 – INVEST IN YOUR TFSA BEFORE YOU PAY OFF YOUR DEBT

When the client has a large interest debt, for example on a credit card, he must eliminate it first before thinking about investing in his TFSA, reminds the financial planner.

If the client has $10,000 in a TFSA that earns 5% per year, and owes 20% interest on the $10,000 credit card debt, the difference is a 15% difference, or $1,500 in interest charges , which is not insignificant.

2- LOAN TO INVEST IN YOUR TFSA

The idea is to invest your money so that it grows at a higher rate than the interest you pay on a loan, says Christine Benz, director of personal finance at Morningstar.

Investors should be realistic about the returns they can expect from their various types of investments, he says. “There is a discrepancy between a collateral obligation (the cost of the loan) and the return, which is uncertain, no matter where it is invested, unless it is in cash.”

3 – CONTRIBUTIONS AND FUNDS IN THE SAME YEAR.

Another error consists in the transfer in the CELI of sums that have been deposited in the account, then withdrawn, during the same year. Every time the client deposits money into the TFSA, he uses his contribution room again, Adam Bornn reminds. He risks exceeding the contribution ceiling set for the exercise if he is not vigilant. You may have to pay a monthly penalty of 1% per month on overcontributed sums, which can represent an orderly sum.

4 – THEY DO NOT HAVE A YEAR-END DEADLINE.

We often forget that the TFSA can be used as a financial planning tool, for example, if a client needs money at the beginning of the next calendar year and has reached his contribution limit for the current year. By withdrawing the sums he expects to need before the end of the year, he will be able to return the contributions to the account the following year without being penalized. Everything takes a little planning.

In summary, the TFSA is an interesting way to grow money tax-free through the magic of compound interest, as long as you remind clients of a few simple rules that can save disappointments.

TFSA limits

$6000

Contribution limit for 2022

$81,500

Lifetime contribution limit.

Leave a Comment

Your email address will not be published.