8 TFSA Mistakes You Must Avoid

Summary

This video highlights eight common mistakes to avoid when using a Tax-Free Savings Account (TFSA) in Canada. It covers the importance of not exceeding the contribution limit, understanding your contribution room, the rules around withdrawals and re-contributions, the purpose of a TFSA for investments rather than savings, the benefits of naming a successor beneficiary, the differences between a TFSA and an RRSP, the implications of foreign investments, and the necessity of regularly reviewing and adjusting your TFSA strategy to optimize tax-free growth towards financial and retirement goals.

Takeaways

• 🚫 Avoid over-contributing to your TFSA; the 2024 limit is $7,000 unless you have carry-forward room, with penalties of 1% per month on excess contributions.
• 🔄 Understand your contribution room; it resets annually and can accumulate from previous years if unused, plus any withdrawals from the previous year.
• 🔙 Refrain from taking money out and putting it back in the same year unless you have remaining contribution room to avoid over-contribution penalties.
• 💼 Use your TFSA for investing, not just as a tax-free savings account, to grow your money and take advantage of tax-free growth.
• 📝 Name a successor beneficiary or account holder on your TFSA to potentially double your contribution room in the event of a spouse's death.
• 🤝 Be aware that being married or in a common-law relationship allows for the naming of a successor holder, which is more beneficial than just a beneficiary.
• 💡 Remember that TFSA contributions do not provide a tax deduction like RRSP contributions, and the rules and limits for each are different.
• 🌐 Be informed about foreign investments within your TFSA; while there is a withholding tax on dividends, it's generally small and shouldn't deter you from investing in them.
• 🔍 Regularly review and track your TFSA account, at least every 3 to 6 months, to ensure it aligns with your financial and retirement goals.
• 📈 Consider the TFSA as a powerful financial tool and make sure to utilize it effectively without making common mistakes that could hinder its benefits.
• 👀 Ensure you're aware of the tax implications and strategies involved in your TFSA to maximize its potential for wealth accumulation.

Q & A

What is the maximum contribution limit for a TFSA account in 2024?

The maximum contribution limit for a TFSA account in 2024 is $7,000 for individuals over the age of 18.

What happens if someone contributes more than the allowed limit to their TFSA account?

If someone over contributes to their TFSA account, they face a penalty of 1% per month on the over-contributed amount.

Can unused contribution room from previous years be utilized in the future?

Yes, unused contribution room from previous years can be carried forward and used in the future.

How much contribution room could someone have accumulated since the introduction of the TFSA in 2009 if they were 18 or older at that time?

If someone was 18 or older in 2009, they could have accumulated up to $95,000 of contribution room by 2024.

What is the rule regarding withdrawing and re-contributing funds within the same calendar year?

You can withdraw and re-contribute funds within the same calendar year as long as you have unused contribution room. However, if you've maxed out your TFSA for the year, you cannot re-contribute in the same year without over-contributing.

Why is it a mistake to use a TFSA account like a regular savings account?

Using a TFSA account like a savings account is a mistake because the main benefit of a TFSA is to invest the money and grow it tax-free, not just to save it.

What is the purpose of naming a successor beneficiary or successor account holder on a TFSA account?

Naming a successor beneficiary or successor account holder allows the surviving spouse or common-law partner to potentially combine the accounts, doubling the tax-free contribution limit.

How does the TFSA differ from an RSP in terms of tax benefits?

The TFSA does not provide a tax deduction for contributions, unlike an RSP. However, both contributions and withdrawals from a TFSA are tax-free.

What is the implication of earning dividends from foreign investments within a TFSA account?

Earnings from foreign investments within a TFSA account may be subject to a foreign withholding tax, typically 15% of the dividend amount.

Why is it important to regularly review and track one's TFSA account?

Regularly reviewing and tracking a TFSA account is important to ensure it aligns with one's financial and retirement goals, and to make adjustments if necessary.

What is the recommended frequency for reviewing a TFSA account to ensure it is on track?

It is recommended to review a TFSA account every 3 to 6 months to ensure it is meeting the individual's financial objectives.