8 ways TFSAs can save you money

The term “tax-free savings accounts” (TFSAs) might be everyday language for financial planners, but if you’re not exactly sure what they’re all about, don’t fret. They’ve only been around since 2009, after all. To clear up any confusion, here’s a TFSA survival guide.

“These are a wonderful tool for saving, as you can hold the same type of investments in it as you can with your RRSP, but tax free,” says DWM Securities Inc. certified financial planner Bettina Schnarr.

“TFSAs work especially well for low-income earners who wouldn’t otherwise fully benefit from deferring their taxes until retirement,” she adds. “And a lot of financial institutions will offer you a higher rate on your TFSA than on a regular savings account.”

Everyone’s circumstances are different, of course, and TFSAs aren’t necessarily the holy grail of personal finance. Plus, most advisors will recommend paying off any high-interest debt first before contributing to a TFSA. (The math just doesn’t make sense.)

However, there are ways to get the most bang for your TFSA buck.

Put your tax refund straight into a TFSA. If it hasn't already been earmarked to cover outstanding debts, you can use your tax refund to invest in your TFSA.

Use up all of your TFSA contribution room. The maximum contribution limit was $5,000 per year from 2009 to 2012; beginning in 2013, this was increased to $5,500 a year.

“Similar to RRSP contribution room, the limit is carried forward each year if not used or maxed out,” says Burnaby, B.C. certified financial planner Satpal Rai.

So unless you’ve been maxing out your contributions since TFSAs started in 2009, you’ll be able to put even more than $5,500 into this account this year.

Systematically contribute to a TFSA. It’s one thing to say you’re going to set aside money for a TFSA, but quite another to make it happen.

“Each pay period set up an automatic transfer from your bank account into a TFSA,” says Margaret Johnson, founder of Solutions Credit “you will not miss $25 or $50 per pay [period], and you will be very happy down the road that you did this for yourself.

Avoid dipping into your TFSA. Just like a regular savings account, you can access the money in your TFSA without taking a financial hit--unlike withdrawing early from an RRSP. But resist the temptation if you can. The longer your money sits there, the more you benefit from tax-free growth.

Prioritize your TFSA goals. “Use the first $5,000 to $10,000 for emergency funds,” says Rai. From there, continue to tier your goals, whether it’s earmarking funds for a dream vacation or for longer-term aims or retirement.

“Moneys that are removed from the TFSA can be recontributed the following years after the redemption,” Rai notes. “For example you withdrew $10,000 in 2012, you can contribute $10,000 plus any carry forward plus $5,500 in 2013.”

Make the TFSA one part of a well-balanced financial plan. “Having both a TFSA and an RRSP during retirement years gives the flexibility of strategically withdrawing funds to control the amount of tax that needs to be paid each year, and to ensure that government benefits are maximized,” says Rogers Group financial advisor Cecilia Tsang.

Consider that contributing to a TFSA in prime income-earning years could save you in your golden years. There are claw-backs on income-tested benefits such as Old-Age Security and Age Credits. When it comes time to withdraw retirement funds, you could actually find yourself making too much money and unable to keep your OAS benefits. Because withdrawals from your TFSA are non-taxable, they will not be included as part of your net income during your retirement.

Remember there’s no age limit. Unlike RRSPs, you can contribute to a TFSA well into retirement.