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TFSA: How are Canadians Using the Tax-Free Savings Account

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The TFSA or Tax-Free Savings Account is a great investment tool that Canadians have access to. Anyone residing in Canada, over the age of 18 can start contributing to their TFSA.

The total amount you can invest in your TFSA is known as your contribution room and this is different for every individual as it depends on the year you could start contributing to the registered account.

So, for a Canadian who could contribute towards the TFSA at the account’s inception, the cumulative contribution room is $69,500. TFSAs were introduced in 2009 and they are extremely flexible accounts. 

Further, TFSA withdrawals in the form of capital gains, dividends, or interests are exempt from Canada Revenue Agency taxes. You can invest in bonds, mutual funds, or equities, in your TFSA. This way you can achieve a diverse investment portfolio and you can aim to achieve optimal returns on your investments.

Overview of TFSA Investments in 2019

Since 2009, TFSAs have slowly gained popularity among investors. After considering numerous benefits of this account, investors have increasingly prioritized contributing to their TFSA. Despite the fact that financial conditions in some parts of the country have been challenging, Canadians are finding ways to contribute some amount of savings towards their TFSA.

According to an annual report by BMO, two-thirds or 66% of Canadians hold a TFSA. Further, another report revealed that in 2019, there has been an evident increase in yearly TFSA contributions and the total holdings have also risen higher and the average annual contributions have witnessed an increase of 10% year-over-year.

Similarly, the average amount Canadians held in their TFSAs was up 4% year over year in 2019, at $28,214, up from $27,053 in 2018. British Columbia residents hold the highest amount in their TFSAs ($32,293) compared to Ontario residents who hold the lowest amount ($26,796).

BMO attributed the increase to strong job growth and rising wages in 2019 that may have aided Canadians, enabling them to increase contributions. However, there is a chance for these numbers to reduce significantly in 2020 given the massive disruption due to COVID-19 and Canada’s rising unemployment rates.

Canadians should focus on savings

Canadians have started investing in their TFSAs due to the flexibility of the account as well as the ability to generate tax-free returns. Last year witnessed an increase in the frequency of TFSA investments by Canadians. More and more Canadians are not only investing in their accounts but also keeping a check on their investments.

Approximately 52% of Canadians choose to check their investments on a monthly basis and 68% check their investments on a quarterly basis. Apart from this, the percentage of investors who put money in their accounts at least once a quarter jumped from 49% in 2018 to 57% in 2019.

You should also note that Canadians are actively participating in the process of investing and trying to make optimum use of their finances. They are trying to learn more about TFSAs and creating an investment portfolio that is in line with their risk profile. This means 45% of Canadians are seeking advice from a bank or financial institution in 2019 compared to 42% in 2018.

After studying the overall report, we can see a considerable change in the investment patterns of Canadians in the last year. There are still 43% of Canadians who have reported having insufficient funds to reach the maximum TFSA contribution limit while 33% require funds to pay for something else, which are barriers to investing.

Maximizing your TFSA Benefits

There are several ways in which your TFSA benefits can be maximized for the year 2020. The contribution room for the current year is $6,000 but since any unused contribution room is carried forward to the next year, you may be able to increase the amount you invest.

Monitoring your investments on a timely basis and avoiding any over-contribution is equally critical. The TFSA is an ‘investment’ account and you should aim to diversify your money into several types of investments.


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