A tax-free savings account (TFSA) is a smart investment tool as it enables you to save money without having to bear tax burden. Though this sounds like a super-attractive option for investors, there is much more to them than you think. Most people think that they know all about these accounts but there are plenty of myths and misconceptions related to them. Let’s have a look at these myths:
1.A TFSA is just a savings account
Theoretically, this account falls under the definition of a savings account as you may put in money and take it out as many times as you want. However, this is a myth because it is more like an investment account where you deposit a part of your savings and let it grow over a period of time. Money deposited once should preferably not be withdrawn unless you have a good reason for it. The best thing about it is that whatever money you deposit as well as the interest you earn thereon are totally exempted from taxes.
2.Each of the TFSA account has its own contribution limit
Since investors can open more than one TFSA account, they do it under the misconception that they would get tax-saving benefit from each one of them. This again is a misinformation as the total annual limit of $ 5,500 applies to all your TFSA accounts, irrespective of the number of them you have opened.
3.You cannot withdraw from the account when you want to
Another myth about these accounts is that you cannot draw money from them whenever you want to. In fact, this is possible but depends on the kind of investment you have made. For instance, you cannot withdraw the funds if they are tied inside bonds or GICs that fall within a maturity date. On the other hand, those without a maturity lock-in period can be cashed whenever you want the money. A smart investor, therefore, should spread the investments so that they can take out the money when needed yet keep a part of investment safe.
4.TFSA can be opened only by those with a running job
If you think that you can open this account only if you have a running job, you are absolutely wrong. Unlike a Retirement Savings Plan, you can open this one even if you do not have a fixed salary to take home. This makes them suitable for students, self-employed individuals and retirees. Anyone aged over 18 years can open it, even if they have no job and zero income status.
5.TFSA will impact the holder’s taxable income
TFSA holders may be apprehensive that it may have an impact on their taxable income but this again is a myth, not a reality. The savings in this account is tax-free and whatever is withdrawn from it will not be included in the taxable income. However, your income needs to be below a certain limit to ensure that you are eligible for certain tax benefits.
6.TFSA savings are not affordable for all
The maximum annual contribution limit for the account stands at $ 5,500 which makes people think that it is meant only for the rich. Again, this is a misconception that needs to be debunked. You can open the account with as low as $ 100 if you have a low saving potential. No rule forces you to contribute the maximum value every year and you can even skip a contribution in a particular year if you cannot afford it.
Having an expert investment advisor can help you make smart decisions regarding the use of TFSA for long-term investment purposes. They can debunk all the myths and doubts you have and give you confidence as an investment.
This post contains sponsored links from Sun Life Financial.
