The Canadian Tax Free Savings Account (TFSA) is a key to your savings plan.
The official government site explains it all in great detail here. (http://www.tfsa.gc.ca/). Basically it is a savings account you can get through any bank in Canada where you can put a certain amount of money in a year and not pay tax on its growth.
- Maximum for 2013: $5,500
- Last year’s limit was $5,000, and has been since 2009
- If you have never contributed to it, you have the $5000 from every year since 2009 plus this year’s $5,500= $25,500!
- Open for all Canadian residents over 18
- All withdrawals are tax free
Many people talk about the benefits of using the TFSA not as a savings account but as an investing account, which is a great idea for many people. (I will get into that at a later time once I have fully figured it out for myself).
The important hitch with the TFSA is the limit. You cannot contribute more than the annual amount (including all the past years you did or did not contribute). If you do over-contribute, even by $1, you will be taxed 1% per month you are over.
A great way to ensure you are not over contributing is to watch your savings!
I have a spreadsheet where I list the date and amount of my contribution, the total of my TFSA savings the the remaining room left in my TFSA. I visit and update this every time I contribute to my TFSA which is at least bi-weekly.
Find a method that works for you to track your TFSA contributions. It’s also super motivating to watch your savings grow!