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.

Outlines

00:00

🚫 Avoid These Tax-Free Savings Account (TFSA) Mistakes

This section introduces the importance of avoiding common mistakes with TFSAs to maximize their benefits. It emphasizes that TFSAs are essential for Canadians over 18 and warns against over-contributing, which can incur a penalty. It also highlights the 2024 contribution limit of $7,000 and the importance of understanding contribution rules.

05:01

📈 Understanding TFSA Contribution Room

This section explains how contribution room in a TFSA accumulates over the years, dating back to 2009. It details how unused contribution room can be carried forward, and withdrawals made in a year can be added back to the contribution room in the following year, using examples for clarity.

10:02

🔄 Avoid Re-contributing Withdrawn Amounts Within the Same Year

This section discusses the mistake of taking money out of a TFSA and re-contributing it within the same year without enough contribution room. It provides examples to illustrate how this can lead to over-contributing and penalties, stressing the importance of tracking contribution room carefully.

💸 TFSAs Are for Investing, Not Just Saving

This section advises against using a TFSA solely as a savings account. It suggests investing the funds to achieve higher returns over time, rather than letting them sit in low-yield savings. The section acknowledges that using TFSAs for short-term savings might be necessary for some, but for most, investing is the better strategy.

👥 Name a Successor Holder for Your TFSA

This section highlights the importance of naming a successor holder for your TFSA, particularly for those who are married or in a common-law partnership. It explains how this can allow for the seamless transfer of funds without needing additional contribution room and why it is preferable to just naming a beneficiary.

🔄 Don't Confuse TFSAs with RRSPs

This section clarifies the differences between TFSAs and RRSPs. It explains that contributions to TFSAs do not provide a tax deduction but grow and are withdrawn tax-free. The section emphasizes the distinct benefits and rules of each account type and the importance of using them correctly.

🌎 Handling Foreign Investments in Your TFSA

This section explains how foreign investments in a TFSA are subject to withholding tax on dividends. It argues that this should not deter investors from including foreign investments in their TFSAs if it fits their overall strategy, as the withholding tax is relatively minor compared to the potential growth benefits.

📋 Regularly Review Your TFSA

This section stresses the importance of regularly reviewing your TFSA to ensure it aligns with your financial goals. It encourages checking the account every 3 to 6 months, reviewing investments, and confirming that successor holders are correctly listed to make the most of the TFSA's benefits.

Keywords

💡TFSA (Tax-Free Savings Account)

A TFSA is a financial account in Canada that allows individuals over 18 to invest money without paying taxes on the growth or withdrawals. The video emphasizes the importance of maximizing the use of TFSA for investment rather than just savings, as it can grow tax-free and provide significant long-term benefits.

💡Contribution Room

This refers to the maximum amount of money that can be deposited into a TFSA annually. The video explains that for 2024, the contribution limit is $7,000, but unused contribution room from previous years can be carried forward. Understanding and keeping track of one's contribution room is crucial to avoid penalties.

💡Over-Contributing

Over-contributing occurs when an individual deposits more than their available TFSA contribution room. The video warns against this common mistake, highlighting that over-contributions are penalized at 1% per month on the excess amount, making it important to stay within the contribution limits.

💡Withdrawal and Re-Contribution

This refers to the process of taking money out of a TFSA and then putting it back in. The video advises that money withdrawn can be re-contributed in the next calendar year. Re-contributing within the same year can lead to over-contribution if the TFSA is already maxed out.

💡Investment vs. Savings

The video stresses that a TFSA should be used for investing rather than just saving. While it is called a savings account, the true benefit lies in investing the money for higher returns, as growth within a TFSA is tax-free. Simply using it as a savings account with low interest does not maximize its potential.

💡Successor Holder

A successor holder is someone who can take over a TFSA without the need for additional contribution room upon the account holder’s death. The video highlights the importance of naming a successor holder, especially for married or common-law partners, to seamlessly transfer the TFSA and its benefits.

💡Foreign Withholding Tax

This is a tax deducted from dividends earned on foreign investments held within a TFSA. The video mentions that while there is a 15% withholding tax on dividends, it should not deter individuals from holding foreign investments in their TFSA if it aligns with their investment strategy.

💡RSP (Registered Retirement Savings Plan)

An RSP is another type of retirement savings account in Canada, offering tax deductions on contributions but taxable withdrawals. The video distinguishes between TFSAs and RSPs, clarifying that TFSAs do not provide a tax deduction on contributions but allow for tax-free growth and withdrawals.

💡Review and Track

Regularly reviewing and tracking a TFSA is essential to ensure it is aligned with financial goals. The video advises checking investments, contribution limits, and beneficiary designations every 3-6 months to optimize the TFSA’s performance and avoid common mistakes.

💡Beneficiary

A beneficiary is a person designated to receive the benefits of a TFSA upon the account holder’s death. The video recommends naming a successor holder if possible, but if not, ensuring a beneficiary is named to facilitate the transfer of funds without tax implications.

Highlights

Avoid over contributing to your TFSA, as the penalty for over contribution is 1% per month on the excess amount.

Understand your contribution room: unused room from previous years carries forward and withdrawals increase your room in the following year.

Don't take money out and put it back in within the same calendar year if you have maximized your TFSA to avoid over contributing.

Use your TFSA as an investment account, not just a savings account, to maximize the tax-free growth potential.

Name a successor holder on your TFSA to allow your spouse or common-law partner to inherit your account without needing additional contribution room.

Don't confuse your TFSA with an RRSP; TFSAs don't provide a tax deduction on contributions, but the growth and withdrawals are tax-free.

Be aware of foreign withholding taxes on dividends from foreign investments in your TFSA, which is typically 15%.

Regularly review your TFSA to ensure it aligns with your financial goals and is invested appropriately.

The maximum contribution room for 2024 is $7,000, with a cumulative total of $95,000 for those eligible since 2009.

Utilize unused contribution room from previous years to maximize your TFSA contributions.

Withdrawals from your TFSA increase your contribution room in the following year.

Avoid using your TFSA as a regular bank account with frequent deposits and withdrawals, especially if you've maximized your contributions.

Investing within your TFSA can lead to substantial tax-free growth over time, making it a powerful tool for long-term financial planning.

Review your TFSA beneficiary designations to ensure they align with your current wishes and legal requirements.

A successor holder designation allows for seamless transfer of your TFSA to your spouse or common-law partner, doubling the tax-free growth potential.

Transcripts

eight taxfree savings account mistakes

you need to make sure you avoid if you

want to make the most out of your

taxfree savings account the tfsa account

you need to make sure you're not making

these mistakes because they can

that plan pretty quickly now the

tax-free savings account if you're not

utilizing it and you're over the age of

18 in Canada you need to make sure that

you use it again we have a different

video on what is a tfsa account we'll

link that above but in this video we

want to make sure you're not making

common mistakes that we see again and

again the first mistake that a lot of

people make is over contributing so for

2024 the maximum you can put in is

$77,000 that's your annual contribution

room now if you haven't used it or

you've taken out money in the past which

I'll touch here in a second you might

have more room but new contribution room

into 2024 is $7,000 if you're over the

age of 18 make sure you don't put in

more than that unless you have some

carry forward room we've seen the

stories where people dump money into it

they don't know there's a limit the

penalty for over contribution is 1%

every single month on the amount that

you over contribute so it's quite

punitive so make sure that you're not

over contributing into the tax re

savings account the second big mistake

that people fall into is not

understanding the contribution roomm

again you get new contribution room

January 1st every year 2024 it's at

$7,000 but if you haven't used previous

years those aren't lost you can use

those today now again depending on your

age but if you were 18 or over going

back to 2009 when the tax savings

account was introduced you could have a

lot of her in fact in 2009 if you were

above 18 years of age in candid here you

would have $95,000 of contribution room

because it accumulates every year so

that's Step One is years that you

haven't made a contribution you can use

now so again coming into 2024 if you 18

back in 2009 you could dump 95,000 into

your tax savings account and allow that

to grow tax ta free for you going

forward the other caveat here is if

you've taken out money in the past you

can get that contribution room back the

following calendar year so let's say in

2023 you had maxed out your tax savings

account but in October you took out

$10,000 you needed it for something that

$110,000 that you took out in 2023 you

get that contribution room back the

following year January 1st 2024 so come

January 1st 2024 your contribution room

is the $10,000 that you took out from

2023 plus your new $7,000 to

contribution room so you could

essentially put in $177,000 throughout

2024 without overc contributing so again

any unused room plus any withdrawals

potential some gain in there as well the

third big mistake people make and we saw

this a lot earlier in the tax savings

World 2009 2010 2011 but we still see it

nowadays and that's taking money out and

putting it back in in the same year now

you can do this as long as you have loss

of contribution room but let's go back

to my previous example 2023 you maxed

out your tax savings account and in

October you pull out $10,000 for a

purchase you need it for something now

let's say you put money back in before

the end of the year you would be over

contributing you're already maxed out

for 2023 you took money out you don't

have any contribution room left meaning

that you can't take money out and put

money back in in the same calendar year

so let's say we use or look at a similar

example where in 2023 you had built up a

tax savings account but you haven't

maximized it you still had 20 or $30,000

of contribution room left so you had a

nice tfsa but it wasn't maximized when

you took that $10,000 out in October if

you still a contribution room yes you

could put it back in that same calendar

year so if you've maximize your tfsa

account make sure you don't take money

out and put money back in and again some

people are using the tax receiving

account as almost like a bank account

money in Money out money in Money out

which could work but as soon as you bump

up against that max contribution you're

going to run into over contribution and

penalty so make sure you understand your

contribution room and make sure you

understand how much money you can take

out and subsequently put back in within

that same calendar year the fourth big

mistake a lot of you are using it for is

a savings account the tax-free savings

account right it's it's a savings

account why not use it a a savings

account look they named it wrong it

should be the taxfree investing account

it's for investing the money that's in

there get it invested make that money

work for you there's no point having a

tax-free savings account where the money

grows taxfree if it's sitting in savings

and sure we're in a bit of a bubble

right now where you can get four or 5%

on a savings account but historically

and probably going forward not too long

in the future here you're going to be

back to 1% or even less on your savings

account so so who cares if it's tax-free

the benefit is to invest that money and

I'm not saying you have to take a lot of

risk in this but have the money earn a

decent amount of return over time so

that you have some growth and you can

pull that out down the road in

retirement on a tax-free basis now again

if you're younger watching this and

you're saving up for a home or something

like that and you want to utilize your

tfsa for something more short term then

sure maybe savings account makes sense

but for the majority of you that watch

our videos and for the majority

Canadians period you're not using it

right if you're putting your money

within your tax savings account into a

savings account earning 1 2 3% you can

invest that money your taxfree savings

account can be invested very similar or

the same as your RSP as your ler as your

other Investments the fifth mistake has

drawn more thank yous than any other

video I've ever done or any other

comment I've done and that is to name a

successor on your taxr savings account

so with your tax savings account you can

name what's called a successor

beneficiary where successor account

holder and what that means is instead of

naming a beneficiary which the account

will go to you name a successor now this

qualifies if you're married or common

law so if you're single unfortunately

doesn't apply to you but you can still

name a beneficiary and pass that money

on taxfree but if you're mared or common

law you can actually name a successor

beneficiary or a successor holder

meaning that let's say you both maxed

out your tfsas and have $95,000 in there

for simple math let's say they've grown

to1 ,000 and let's say you lose your

spouse so your spouse passes away if

you're named as the successor holder you

can potentially take your 100,000 and

then their 100,000 comes into your

taxfree savings account as well so you

don't need the contribution room to take

over their account so now you have

$200,000 in your tfsa going forward so a

lot double the money growing taxfree and

when you pull money out of there you

don't lose that contribution room so it

essentially doubles your taxfree contri

contribution limit now if you forgot to

name a successor holder and you only

named a beneficiary and your spouse or

common law passes away there are there

is a workaround you can still lump it in

there it's more complicated it's more

paperwork timing there can still be a

bit of a tax spill just name a successor

beneficiary so if you are Merit or

common law partner you need to make sure

that on your tfsa you've listed a

successor beneficiary or a successor

account holder to make sure that if that

person passed away or if you pass away

that those accounts get can be lumped on

top of each other and and essentially

Amalgamated into one doubling or

increasing your contribution limit go

check your tfsa account did you name a

successor or just a regular beneficiary

make sure you make that change most

banks don't name a successor holder for

whatever reason so go check that out a

lot of you are holding your accounts at

the bank make sure it's listed properly

the sixth mistake that we see a lot is

mistaking your tfsa for an RSP and I get

it you you know that they're different

but a lot of you think that when you put

money into a tax or savings account you

get a tax refund any money you put into

a tfsa account does not give you a tax

deduction it's after tax money going in

there's no tax deduction but the money

grows taxfree and is pulled out taxfree

so it does work differently than an RSP

so don't confuse tfsa and RSP both great

tools to build wealth and build money

for retirement and all that the TFC is a

great flexibility account but don't get

the tax deduction and the limits work

differently as well again when you

utilize an RSP limit it's lost forever

whereas your tfsa you can earn back you

don't get the tax deduction on the tfsa

you do on the RSP they're different

types of account you want to utilize

them both efficiently but they are

different so make sure you understand

the differences between the two mistake

number seven is understanding how

foreign investments work within your

tfsa account so if you earn a dividend

from a foreign investment there's a

foreign withholding tax on that

typically

15% of the dividend so if you get a

dollar dividend from a company that you

own in your tax receivings account there

will be a 15% withholding tax now I see

a lot of times people say I don't own

foreign investments within my tax

through savings account because I don't

want that withholding tax look it's only

a small amount on the dividend only not

on the growth of the stock just on the

dividend if it pays a dividend don't be

someone that says I I don't own foreign

investments in that my tax or savings

account CU it doesn't make sense look if

you own those foreign investments in

other accounts and you strategize and it

makes sense from a holistic overall

Viewpoint then fine but for myself I own

some US stocks in my tfsa account do I

pay a bit of a withholding tax on the

dividend sure but I also think there's

good growth potential I want that growth

to be taxfree versus in my

non-registered account or elsewhere so

again there's strategy here so be aware

that there is a withholding tax on the

dividends you earn on any foreign

investment in the within the tax or

savings account but that doesn't mean

you should ignore foreign investments

altogether so again they should

potentially still be part of that

portfolio but be aware that there is a

very small withholding tax on the

dividend piece if there is a dividend to

begin with the eighth and final mistake

that we see all the time is pretty

typical for a lot of you is you don't

follow or track or review your tfsa

account and this comes in many forms

have you reviewed your successor Holder

have you listed a successor Holder have

you reviewed your Investments or is it

all just sitting in cash or in a savings

account right now you want to understand

how a tax savings Works how it's working

for your overall plan again TFA account

it's a very powerful tool in your

overall financial plan and retirement

plan how is it working when did you last

review it again you shouldn't be in

there every week reviewing it a lot of

you are don't do that but also make sure

you're reviewing it every 3 to six

months is it on track is it doing what I

wanted to do is it earning money for me

is it doing the things it needs to do to

reach my retirement goals my financial

goals and if it's not they make some

adjustments but too many of you are just

kind of forgetting about your tax re

savings account again this is a gift the

Canadian government doesn't give us too

many gifts this is a gift the tax re

savs account make sure you're utilizing

it and make sure you're not making any

of these eight mistakes we talked about

today