1. Pay off your high interest debt first.
If you currently have outstanding debts with high interest rates (i.e. an outstanding credit card balance), it might make more sense for you to pay off that debt first, before you start investing is a TFSA. Interest rates on credit cards can range from 6-30%. If you're making a lower interest rate on your savings (which is highly probable), it makes more sense to get rid of your debt first - otherwise, it's kind of like putting water into a bucket with a really big whole in the bottom.
2. Contribute to your RRSPs first.
If you haven't maximized your RRSP contribution, you should considering doing this first, before you invest in a TFSA. When you contribute to a RRSP you get an immediate tax deduction - your contribution reduces your income for tax purposes in the year that you contribute. This is not the case for a TFSA.
However, if you expect your income tax rate in retirement to be higher than it is now, or if you have no earned income, or if you are likely to be eligible for income-tested government benefits and tax credits, then investing in a TFSA before a RRSP would provide additional benefits. Always speak with your financial institution or a Financial Advisor about your personal situation.
3. Use your full TFSA contribution.
You are eligible to invest up to $5,000 into a TFSA. If you have the money, you should invest the maximum amount at the beginning of the year in order to gain the most benefit from the compounded tax free interest.
If you are unable to make the payment all at once at the beginning of the year, consider arranging an automatic debit of $400 from your bank account every month into your TFSA. Smaller regular contributions can be easier to manage.
4. Avoid penalties for over-contributing.
If you go over your contribution limit, you will be taxed 1% of the amount you have gone over for every month. That can add up to a hefty tax bill and quickly eliminate the tax free benefits on your interest income. Make sure you keep track of the amount you invest every year and remember that you can not top up withdrawals until the following year (if you have already hit your investment limit).
5. Look for the highest rate of return
The higher the interest rate on your investment the more quickly your savings will grow. Make sure you compare the market to find the highest interest rate before selecting your TFSA investment vehicle.
Also, if you decide you don't like your investment half way through the year and withdraw the money to invest in different type of account, that contribution will be added to your original contribution and could put you over you $5,000 limit. To avoid this, you need to open the new investment vehicle and then have the money transferred directly to it from your existing plan.
6. Make use of missed contributions
Unused contributions to your TFSA can be carried forward and accumulated for future years. This allows you to catch up on your savings if you were short on cash one year or if you had to make a withdrawal.
7. Maximize your family contribution.
Make sure your family is taking advantage the TFSA benefits. You are allowed to give a spouse or partner the money to contribute to their own plan with no income attribution rules.
8. Resist the temptation to dip into your TFSA.
There are no penalties for making a withdrawal from your TFSA, that's one of the great things about this type of account. However, this can also create temptation. Have an idea before hand about the types of items or situations that would justify dipping into your TFSA. Say no to all other items that aren't on the list.
9. Name a successor.
This will ensure that the assets from your TFSA will be easily transferred to your loved ones upon your death. A successor can be a spouse or common-law partner. Children can be named as beneficiaries. It's best to confirm with your financial institution that a success was named when the account was opened.
10. Get expert advice.
Check out our TFSA Guide or the Government of Canada website for more information on TFSAs.
You can also speak with your bank, credit union or a financial advisor about your personal situation. If you don't have a financial advisor, you can find one through the Financial Advisors Association of Canada.