Finding a way to save and invest to reach your financial goals is very important. For those that are in Canada, one great tool that can help them to reach their financial goals is a Tax-Free Savings Account, or TFSA. This is a very unique investment vehicle that allows your investments to grow tax-free while also allowing you to withdraw funds whenever you want. Because of this, it can be a great option no matter what your savings goals are. While there are clear advantages that come with investing in a TFSA, you do need to consider how much you should put into the account. There are several factors to consider when determining how much to contribute to a TFSA.
Pay off Debt First
Before you start thinking about investing in a TFSA, you should first make sure that your high-interest debt is paid off first. If you have a lot of money outstanding on credit cards, payday loans, or other high-interest accounts, you need to get out of this debt first. As the interest rates on this type of debt can be well over 20%, paying it down is the best guaranteed investment that you can make.
Consider Savings Rate
As you are preparing for your future, you should consider a good percentage of your income to save each month. Ideally, you should save at least ten percent of your income into some form of savings and investment account. Due to the tax benefits, it could make sense to put money into the TFSA first before any other accounts that you have access to. The more you can save and invest, the better off you will be in the long run.
As you are planning on making an investment into your TFSA, you should also carefully consider the annual investment and contribution limits. Currently, you are permitted to contribute up to $6,000 per year into your TFSA. However, this amount will change regularly with inflation. There have also been years in which the contribution limit was much higher, such as in 2015 when you could contribute $10,000.
If you have never invested in a TFSA before, you should also consider your options when it comes to an initial investment and deposit. For those that are looking to invest in a TFSA for the first time today, you can invest up to $63,500 into the account. This amount is equal to the annual contribution limits that were set each year from 2009 through 2019. This could be a great lump-sum start to build your nestegg.
Whenever you are looking for a place to invest, using a TFSA is a great option. These accounts provide a wide range of benefits including tax free growth, a multitude of investment options, and flexible withdrawals. If you are thinking of investing in a TFSA, it is important to carefully consider how much you should invest in these accounts. Following these tips should help you to carefully figure out what contribution level is right for your situation.