All you need to know about TFSA
The Power of TFSA
What is TFSA?
The full name of TFSA is Tax-Free Savings Account.
TFSA is a tax-preferential account set up by the Canadian government for every eligible person. Your TFSA savings can be withdrawn from your account at any time, for any reason, and all withdrawals are tax-free. And if you want, you can put back the amount you withdraw into your TFSA. However, you have to do it the following year so it will not impact your contribution room.
You can put various products in the account, such as:
- Cash
- Guaranteed Investment Certificates (GICs)
- Mutual Fund
- Exchange-traded funds (ETFs)
- Stocks(U.S and Canadian and International)
- Real Estate Investment Trusts (REITs)
- Bonds
- Options
- Gold and silver
If you are still using a TFSA account as a “savings account” PLEASE DO NOT.
Why do I say that I need to manage my account properly? Because most people think that TFSA is just a regular savings account, deposit cash or only deposit products with low-interest rates.
If you use TFSA in this way, it is a pity that you miss out on the more cash flow it can bring every year, because all investment gain in this account is tax-free, so the returned income you get depends on what investment project you choose.
Who is eligible to apply for a TFSA account?
- Must be 18 years old or older
If you live in British Columbia, Newfoundland, and Labrador, or New Brunswick, you must reach the legal age of majority in these provinces to be 19 years of age to apply for TFSA.
- Need to have a Social Insurance Number(SIN) Card.
Even if you are just an international student or a foreigner who comes to work and holiday, as long as you are an adult and have a SIN card, you can basically apply for a TFSA account.
TFSA Annual Contribution Room
The TFSA account is a savings benefit given to the public by the Canadian government, but of course, the government does not want everyone to deposit unlimited money in a tax-free account, so there is a limit on the amount of contribution each year.
If you meet the TFSA requirements in 2009 and have never opened a TFSA account, In 2024, you will have accumulated a total of $95,000 in contribution room. If you are still using it as a “savings account” please don’t.
If you were less than 18 in 2009, you will have whatever room accumulated in the years you were 18 or older. For example, if you turned 18 in 2021, then in 2024, you will have a total of $25,500 in accumulated space.
What products are suitable for investment in a TFSA account?
- Low-interest rate products are NOT recommended.
For example: investing in GIC products. The annual rate of return is only about 1-2%.
TFSA is a very powerful provincial tax account. If you just save low-interest-rate products, you will miss the tax-free benefits that products with better investment returns will bring to you.
- High-risk products are highly NOT recommended.
If you invest $69,500 of all your calendar years in high-risk stocks in 2020, and you lose $30,000 and sell stocks, you will lose this $30,000 forever, and you will not be able to make up another $30,000 next year. It is equivalent to saying that your total TFSA room is left at $39,500, plus the new TFSA room given to you by the government in the next year.
If you lose money and withdraw the cash, part of the tax exemption will be lost forever. This is why it is highly recommended not to invest in high-risk products.
- Highly recommended to invest in strong foundation blue-chip Stocks, Mutual Funds or ETFs.
Suppose you invest $69,500 in blue-chip stocks for all your calendar years at one time in 2020, and you have earned $30,000. Add your principal and the total account amount is $99,500. When you withdraw $99,500 from your account, your TFSA limit will become $99,500 is equivalent to an increase in your TFSA tax exemption limit. You can deposit $99,500 at any time next year, plus the amount is given to you by the government in the new year.
How to increase the power of compound interest?
Everyone should choose investment products according to their own risk ability.
Some people can afford a loss of 30%, some people can only afford a loss of 10%... etc. Everyone is different. However, if we can persist in investing in good products for a long time, the stock market will show an upward trend.
In my opinion, what I care about is whether I choose a strong company or not. I don't care about the fluctuations in the company's stock price. I only choose value companies that I trust. When the stock price is falling, I will not sell stocks out of fear. On the contrary, I am very happy that I can buy more shares at a cheaper price.
Remember that volatility in the stock market is unavoidable, but in the long run, the stock market is showing an upward trend, so what investors must need is time and patience to maximize returns.
Suppose you bought Apple stock in a lump sum of $41,000 from your TFSA for the past 7 years in 2015.
In the next few years of holding Apple stock, even if you did not buy anymore the stock at the low point, also, you did not sell the stock shares when the stock price fell to -30%.
As of September 2020, Apple stock has brought you a total income of $188,578, which is close to a high rate of return of 350%!
It shows that if you can persist in holding a good company for a long time and have the patience to make investments, it will bring rich returns to investors.
What happens if I over-contribute to a TFSA?
The Canada Revenue Agency (CRA) imposes a tax of 1% per month, for each month or partial month that the over-contribution remains in the account. The 1% tax will continue to apply until one of the following:
The entire over-contribution amount is withdrawn; or for eligible individuals, the entire over-contribution amount is absorbed by additions to their unused TFSA contribution room in the following years.
Buying ETFs in the bear market
In the past 3 years of the pandemic, you have had a total of CAD 18,500 contribute room to manage your finances.
The annual TFSA dollar limit for the years 2019 to 2022 was $6,000.
The annual TFSA dollar limit for the year 2023 is $6,500.
If you prefer and are optimistic about US technology stocks like me, the US stock ETF code: QQQ is a good choice. The full name of QQQ is Invesco Nasdaq 100 Index ETF, which means that you own the stocks of the top 100 technology companies in the United States at a time, such as Apple, Microsoft, Amazon, Google, Tesla... and so on.
As shown in the figure below, if you buy $6000 into QQQ in a bear market in March 2020, the total return will grow by about 80%.
Even if you are unlucky and bought QQQ at a high price just before the sharp drop in March, the rate of return is still good, with a growth of about 50%.
You don’t have to put your principal into the market all at once. Entering the market in batches is also a smart investment method. The advantage is that you can evenly share the purchase cost price.
Money Mind-Set
If you don't want to spend most of your life making money, then you have to let your money work for you. This means not just spending your precious time working hard but working wiser.
When you start investing at the age of 25, saving $100 every month until you are 65 years old, and you put this $100 in an index fund (S&P 500), then you will have a million dollars to use for your golden years.
However, let's say you wait just for 10 years, which is $1,200 a year, for 10 years that's $12,000, which sounds not that much money. so you start at 35 years old, you have only $300,000 at the age of 65, those 10 years cost you $700,000. This reality sounds pretty crazy, right? This is less than half of what you would have saved if you had started early.
So invest NOW, invest early!
Someone once asked Warren Buffett: Your investment mentality seems to be very simple. Why do many people follow you when they choose stocks and they may not make money?
Buffett replied:
Because nobody wants to become rich slowly!
Investment is a long-distance running journey of a lifetime, not a short 100-meter sprint. Learning how to manage financial investment, persist in long-term investment in value assets, and make good use of time brings the power of rejuvenation. I think it is the key to the success of smart investors.
Making money in the stock market in one year can’t be said that you are great. Investing for 10 or 20 years is the real effort to make money every year because Fear and Greed are the 2 major weaknesses of human beings.
Investors are always asking when is the best time to get in the market? To be honest, every time I decide to buy more stocks, I think it’s the highest point, but looking back, it’s actually the best buying point every time, because,
Remember that volatility in the stock market is unavoidable, but in the long run, the stock market is showing an upward trend, so what investors need is time and patience to maximize returns.
If the Company business is doing well the stock will eventually follow - Peter Lynch
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