My teenaged relative who has his first job and his first no-fee chequing account for direct deposit of his pay will soon be eligible to open his first TFSA as well. I doubt very much that he will listen to me or even ask me what type of TFSA he should consider but I’ll write this down now just in case he reads my website. (Not likely!) So here are some suggestions for how a teenager could or should be use a Tax Free Savings Account, or TFSA.
Everyone Needs Some Cash Savings For Emergencies
Recently on RedFlagDeals, someone asked who would ever pay $20 to borrow $300 or use one of the many payday loan sharks ***. Many people added their opinions including one person who said it’s very easy to end up too short of cash to handle a $300 emergency. That led to even more comments.
Basically, it’s true that if at all humanly possible you should try to have some cash savings for emergencies. Life happens. Often.
This morning, my car started making an odd faint squealing noise when making certain turns. It could need new brakes. It could need a wheel alignment. It could be nothing. Just getting it checked out will likely cost close to that fictitious $300 much less getting any needed work done. The zipper on my child’s boot broke, too. And there’s a draft around the front door suggesting we need to replace either the caulking or the weather-stripping or both. Rent goes up. Bell just jacked up the rates for the internet again.
So my first suggestion for a teenager who is now eligible to open their first TFSA, at 18 in most provinces and 19 in some, is to save up your first $5500 in cash.
(If a teenager already has more than $5500 in cash savings, they should read ahead: higher earning investments should be sheltered in the TFSA and emergency cash can be kept in a regular non-registered savings account.)
Where Should I Keep My Cash TFSA Account?
Banks both like and dislike TFSA cash savings accounts. They have figured out that they can charge you a painful transfer out fee if you decide to move your cash from their TFSA to another bank’s TFSA. They set those transfer out fees so high that you lose any yearly profit if you move a small balance to try to get a better interest rate somewhere else.
Banks dislike these accounts, though, because you can get around the transfer out fee once a year. If you get fed up with the interest rate at your bank, you can withdraw your TFSA cash during the last few business days in December. Then, in January of the next year, you can deposit it elsewhere. (You can’t deposit it right away in December if you have already made your maximum allowable contribution to your TFSA. But the amount withdrawn in previous years gets added to your contribution room for future years so you can re-deposit the same amount in January as it is the beginning of the next year.)
Check details of any bank TFSA carefully before opening an account. Some might charge you if your TFSA balance drops to or nearly to, 0, or if you close your account. That could make it expensive to move your TFSA cash to another bank for a better interest rate.
OK, so where are some reasonable places to keep your emergency cash in a daily interest TFSA savings account?
- Many credit unions offer reasonable interest rates and rules
- Tangerine. It offers, as of February 2017, 0.8% a year on cash savings in a TFSA, sometimes with a month or two of higher interest for new contributions. Tangerine charges a $45 fee (as of February 2017) to transfer your cash out of your TFSA to another bank. You can withdraw it for free but you can’t contribute it elsewhere until the next January 1, unless you have enough remaining unused contribution room.
- PC Financial. It offers, as of February 2017, 0.8% a year on cash savings in a TFSA, sometimes with a month or two of higher interest for new contributions. PC Financial charges a $50 fee to transfer your cash out of your TFSA to another bank. You can withdraw it for free but you can’t contribute it elsewhere until the next January 1, unless you have enough remaining unused contribution room.
Oaken Financial offers, as of February 2017, TFSA GICs but not a TFSA cash savings account. If you don’t mind locking up your money in a GIC for at least 12 months, they offer good rates. In February, 2017, they are offering 1.75% for a one year GIC. NOTE: You can NOT get your money out until the GIC matures one year after you purchase it. This is not a “cashable” GIC.
If I Don’t Pay Any Tax Why Bother With a TFSA?
Many teenagers don’t earn enough money to pay any income tax. That can make it seem pointless to keep their cash in a TFSA. Any interest they earn on their cash in a regular savings account is also “tax free” if their combined income from work, interest and any other sources of income is less than their deductions including the basic personal amount.
I’d still suggest opening a TFSA.
If you set aside your “emergency” money in the TFSA it may reduce the urge to spend it on regular entertainment expenses.
It can also be the beginning of longer-term savings strategy.
You can always withdraw cash from a savings account TFSA as long as you remember you cannot always put it back in until the following January 1. So if you get a great interest rate offer on your regular savings account, you could always pull the cash out of your TFSA and take advantage of that rate.
It usually doesn’t take long to start earning enough to have to pay tax. When you do, be sure to start a TFSA.
When Should I Start Investing in a TFSA?
A cash daily interest savings account TFSA is useful when you only have $5000 or so saved. But when you start to save more than that, it’s time to consider investing some of your money while saving the rest. I’ll describe one strategy for investing in a TFSA in the sequel to this article.
- Tracking your TFSA Contribution Room Can Save You from Fines
- Should You Save for your First Home in Your TFSA or RRSP?
- Maximize Your TFSA First
When did you open your first TFSA? Would you encourage a teenager to open one as soon as they turn 18 (or 19)? Please share your views with a comment.