Liz and Dan Allen cover five TFSA mistakes: treating it like a savings account instead of investing long-term, re-contributing withdrawn money in the same year (which triggers penalties), using aggressive maximizer strategies without consulting an accountant, and misaligning beneficiary designations with your will.
CRA is paying attention to those strategies. So all I caution people about as soon as they bring up the old tax free savings account maximizer strategy is, hey, you know, when CRA comes knocking, it's you, they want to talk to you.
5 tax free saving account mistakes that you must avoid. I'm here with Dan Allen. I'm Liz, and we're going to go through five mistakes that are really important for you to avoid when you're using a tfsa. So let's start with the first one, Dan. Avoid using it like a savings account. What do we mean by that?
When you think about savings, you know what, what do you do with the savings account? You put money in and then you draw it out. So what we were thinking here is that one thing you can do and one mistake to avoid is like putting it in and then pulling it right out and it stops your growth. And we're all about make sure you gain the advantage of compounding over time. So don't use it like a savings account.
And understanding that the value of the tax free savings account is that you're not being taxed on the growth of that money. So being able to take the most advantage of that means that you can then also earn money and interest on the money that you've also grown. So if you can have that compounding effect and let that stay in there and gradually increase, then that's going to make the biggest difference. If you're pulling that money out and using it in a taxed environment, you've suddenly lost the benefit of being able to grow that in that tax free environment for yourself. And that also ties into our next point, Dan, which is sometimes people believe that a TFSA has more flexibility than perhaps it does. So one of the rules with a tax free savings account is that you cannot put money back in the same year that you've withdrawn it. So, so if you withdraw money in a particular tax year, you actually need to wait until the following tax year to put that money back into the account. So that's basically points one and two kind of tie in together because if you take that money out early on in the year and then you're ready to put it back in partway through the year, you actually can't until the following year. And so you've also lost all that time of when you could be earning tax free money in terms of the interest that you could be accruing on that money inside the account.
If you aren't familiar with tax free savings account and how much you can put in each year what the limits are for tax free savings account because they're out there. I'm just going to encourage you to go to our website. There's a great article at the bottom, right, about tax free savings accounts. It shows you how much your maximum contribution could be to date. And just make sure you understand those nuances, that if you fully funded it, you cannot take money out that's a year and then put it back in. You can take it out but you can't put it back in that year. You have to wait for the next calendar year. And if you don't, there's a penalty. And none of us like the word penalty. And it can be quite substantial depending on how much you've taken out. So just be aware of those things. That's a huge one. And just like Liz talked about, under point one is like, you know, if you leave your money in there and it keeps on growing and growing and you know, you, you put it in a thing in there and you want it to grow over time and you want to just get better and better and if, you know, if you pull that out, you stop the growth of whatever you had going on there. So it's just like learn as much as you can about tax free savings accounts. What's the value? How would you use it best to help generate wealth? Because that's what it's about. How do you best use your dollar to generate wealth?
So speaking of attention from the cra, Dan, what else do people need to watch out for?
Well, I don't know if you have heard about that, you know the tax free savings account maximizer strategy. I have and I've actually seen papers on it and I've seen where, you know, CRA is paying attention to those strategies. So all I caution people about as soon as they bring up the old tax free savings account maximizer strategy is hey, you know, when CRA comes knocking, it's you, they want to talk to you. And you're going to have to be able to demonstrate to them that what you have done hasn't been outside of, you know, the rules. And you know, really, if you are outside the rules, then you're the one that's on the hook for that. So just be cautious. Like I've seen how they look so lucrative you could do this and you can maximize your tax free savings account. Talk to a good accountant, someone that's got your best interest at heart about that strategy before you apply it because they should be able to explain to you what CRA's approach and thoughts would be on that strategy. So that's the third one. Be aware of a tax free savings account. Maximize their strategies because they may not maximize everything you think it's going to maximize.
All of these points really are about educating yourself really well on how this strategy works. Using a tax free savings account can be a very valuable tool in your tool belt. It's just understanding the different pieces of it and how it plays out for the entirety of your life, but also when you pass away. So, so you can nominate a beneficiary and there's a couple of different ways to do that on your tax free savings account, but the important thing is to make sure it aligns with whatever you have in your will. So if those are different, then the money may not end up where you intended. So just make sure that you have an alignment of where you have your beneficiary for your tax free savings account, in fact of all your assets and also what you're putting in your will. And that's something that I encourage people to review on a semi regular basis and just make sure that those documents are in alliance with each other and up to date as well so that your wishes are carried out on your passing. And if you don't have a will then I would encourage you to go and action that as soon as possible.
You and I both know, Liz, that if you're watching this video, one of the best complimentary tools that you can have to go with your tax free savings account is a dividend paying whole life insurance policy. Without a doubt, we understand how that works and we know how well it fits together with tax free savings and it's got a lot of flexibility that you're not going to get from your tax free savings account. You can take your equity out in different ways and you can put it back. You're not limited. It's a great place and a great tool to have to supplement what you're doing with some product like a tax free savings account. So we just love to encourage you to consider that. And you know, as we talked and we thought about this list of stuff that we wanted to share with you today, we just go like, yeah, educate yourself, look at how you generate wealth within your family and what are those pieces that you need to do have in place to do that. So I hope you know this has just been an opportunity to share some of what you need to know about tax free savings account.
If you'd like to learn more about how to use a whole dividend paying whole life insurance as a strategy with your tax free savings account. Click on the videos that are appearing. Besides.
