Tax-Free Savings Accounts (TFSAs), despite having the word “Savings”, can hold investments, too. And any income earned in the account (including capital gains and dividends) is generally tax-free, even when it is withdrawn.
Here are three ways that you can use a TFSA to help you reach some of your financial goals.
- Emergency Fund. The first thing any new investor should do is establish is an emergency fund. Ideally, this money is kept as cash, or anything else with no risk and easily redeemable, like a high interest cash ETF. And you might as well be earning interest on this money. The good news is that interest earned in a TFSA is not taxed, so you can keep this money safe, with interest compounding as efficiently as possible.
- Saving for a big purchase. If you’re saving for a down payment for your first home, you might want to consider the Home Buyers’ Plan (HBP) which is tied to a Registered Retirement Savings Plan (RRSP), or the new Tax-Free First Home Savings Account (FHSA). But if you’re saving for another larger-than-usual purchase that you will be buying soon, like a vacation or a vehicle, the TFSA is a great place to do that. As with the emergency fund, keeping these savings in cash or cash ETFs can be a great option.
- Investing for retirement. Because investment income isn’t taxed in a TFSA, it can be an ideal place to invest for retirement. If you can invest for retirement in both your TFSA and RRSP, great! If you have to choose between one or the other, our free guide can help you decide which account may be best for you. Unlike the emergency fund or saving up for a big purchase, longer-term goals such as retirement should generally be invested in things like stocks and bonds, or in funds that invest in stocks and bonds. Our Evermore Retirement ETFs are a great option for retirement investing in your TFSA.
TFSAs are a flexible account that can be used to achieve short-term and long-term financial goals. New contributions are permitted on January 1 of each year. How will you be investing this year’s contribution?
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This article is for educational purposes and must not be construed as specific investment or financial advice. Where relevant, seek advice from a licensed financial advisor for help tailored to your specific circumstance. Commissions, fees and expenses may be associated with investment funds (including ETFs). Read an investment fund’s prospectus before investing. Investment funds are not guaranteed, their values change frequently, and investors may experience a gain or loss. Past performance may not be repeated.