8 TFSA Mistakes You Must Avoid

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

Channel: Parallel Wealth

Views: 39,331

Keywords: Financial Planning, Retirement Planning, Estate Planning, Retirement, Tax Planning, Investing, Real Estate Investing, Stocks, Bonds, Savings, Passive Income, RRSP, TFSA, Wealth, Parallel Wealth

Id: px-zTSX48w8

Length: 11min 20sec (680 seconds)

Published: Mon Jun 03 2024