Is there anything not to love about a tax-free savings account? We’d like to think there isn’t. Any 18 year old in Canada can open a tax-free savings account, put their money in, watch it grow through investments, and then take out that money tax-free. TFSAs can be used for a variety of goals including saving for retirement, cars, houses, vacations, or investing in the stock market. If you need more convincing to open a TFSA for your child today, we have another 3 reasons below.
The Magic Of Compound Interest
When you open a TFSA for your teen they will have plenty of time to take advantage of compound interest. This is the exponential growth of their money. As long as they continue to make yearly contributions to their TFSA, their savings will continue to grow. You need to keep your teen focused on the long term. Compound interest is the most powerful tool when planning your teens retirement and future goals.
A TFSA can have an immediate impact on your teens' education and paying off their upcoming student loans. Frequent contribution to your child’s RESP will give them access to government grants. However, this money is taxed upon withdrawal. A TFSA allows you to save extra money for your teens' education, and the savings are not taxed upon withdrawal. In addition, there are no penalties if your teen chooses to skip post-secondary school.
Easy To Invest Out Of A TFSA
TFSAs are a great way to introduce your teen to the stock market. Simply making yearly contributions and relying on low interest rates to grow their savings will not be enough to help your teens reach their goals. It is important for your teen to invest out of their TFSA to optimize their account. You don’t just want your child to be a great saver, you want them to be rich!
We know that young people are not exactly swimming in money. This should not discourage you or them to make monthly contributions to their TFSA. Once they are in a saving routine, encourage them to invest a percentage of their contribution in a low-cost index fund. An index fund is a safe investment and can help your teens' savings grow quickly.
Not sure what funds or stocks to invest in? This is where Explorer Hop can help! We have a series of online programs and courses which can help your teens prepare to invest out of their TFSAs. In our award winning Camp Millionaire program, teens will learn how to manage risk, evaluate earnings, and track financial trends to ensure they make safe and profitable investments. Explorer Hop is offering a FREE demo on June 26th for students and parents to meet our teachers and learn more about the program.
No Tax Payments When Withdrawing Money From A TFSA
Both TFSAs and RRSPs serve the same purpose of helping your teen save their money for a future goal. TFSAs have an advantage over RRSPs when it comes to tax payments. When your teens contribute to their TFSA, that contribution has already been taxed. So when they withdraw their contribution at a later date, they do not have to pay taxes. It is tax free. When your teen contributes to their RRSP the money has not been taxed. The money is only taxed when they withdraw from their RRSP. However, your child will be in a higher tax-bracket when they go to withdraw this money, which means they will be paying a higher fee in taxes. That’s where a TFSA has an advantage, especially for young adults.