A TFSA, or tax-free savings account, was first introduced in 2009 for Canadians to create an investment savings account whereby all growth on their deposits are not taxed.
Really, every Canadian over 18 should have a TFSA as part of their plan to save for the future. If you were just starting out today and had not been contributing since 2009, you could invest $69,500 per person in 2020. The maximum contribution for 2020 is $6,000 per person, but the Canadian government allows you to make up for previous years, so if you are not at the $69,500 limit yet, you can top up your TFSA to this maximum.
Why is it so important to have a TFSA as part of your retirement plan?
Remember that money in retirement is the byproduct of a well-thought-out, successful plan — and having a TFSA is definitely part of that solution.
When you first retire, there is usually a high degree of pent-up demand created by unforeseen expenditures we had not anticipated. Many Canadians underestimate their spending in retirement and when asked, most new retirees were not able to cut back on their spending as they had planned once in retirement.
The harsh reality is that they were not able to lower their standard of living drastically once they stopped working and found that in the first few years, there seemed to be a very high burn rate.
This is called the Honeymoon Stage. How can you blame them? New retirees are healthy and active and all those pictures they have been cutting out of the travel section of the paper for the past couple of years look like great places to finally visit.
TFSAs are also good as an emergency saving account for those savers who want their investment to grow tax free and still have access to their funds at any time.
Money can be withdrawn without restrictions, but be careful when replacing those funds at a later date. Deposits back into your TFSA will be restricted to your annual contribution and any overpayments may be subject to penalties.
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