The part where they used to say it’s never too early to start saving for school.Now they say it’s never too early to start saving for retirement!
As of January 2009, the Tax Free Savings Account is a new investment option offered to Canadians. Canadian residents over the age of 18 are eligible to contribute $5,000 per year to a registered TFSA (Tax Free Savings Account). Any investment within this account will be exempt from taxes. What are the implications of this savings tool for students? Is it a worth saving option? Let’s understand why the tax-free savings account may be the best option for students.
Student income: Some peculiarities
1. Students are in a low tax bracket as they have no income or very nominal income.
2. Typical sources of student income are
– Scholarships and Scholarships
– Research grants, study grants, project grants, etc.
– Labor income (with T4 tab)
– Recorded income from the Education Savings Plan (RESP)
– Income from tips, gratuities and occasional, sporadic earnings
3. Common deductions students take are interest paid on student loans, tuition, cost of books, moving and child care expenses.
4. Younger students often rely on their parents for a significant portion of college expenses.
5. The propensity to save for retirement is lower for younger students. They tend to defer such actions until they complete their education or until they have full-time jobs.
Implications for students
In light of the peculiarities presented above, the following paragraphs will highlight the implications of a TSFA for students. Depending on what your financial goals/objectives are and what you hope to do with the money you save, you can decide if TFSA is the right option for you.
1. If you are a Canadian student investing in stocks or other assets through an investment account, you are eligible to pay taxes on income earned in the form of dividends, interest, etc. The TFSA will allow a student age 18 or older to hold any investment vehicle they may now hold within a regular investment account. The only difference is that capital gains from investments made within this account and withdrawals would be absolutely tax-free.
2. It is wise to think about your future during your study period. You may want to focus on long-term retirement savings. Alternatively, you may want to make savings in the medium and short term to spend on a car, down payment on the house, wedding, etc. Having a tax-free savings account is a better option than having no savings at all.
3. The safest and possibly best option for students is to deal with student loans (and strive for the lowest interest rates), get a part-time job, earn some income, and try to put some of it into a TFSA. Your commitment to address your future financial needs will pay off big.
4. Many banks and other financial institutions such as Royal Bank, BMO, CIBC, etc. They offer tax-free savings accounts. Several banks are also offering early bird specials to people who open an account with them before the end of the year. It’s clear that a tax-free savings account is the best option for students who plan to save early for retirement and medium- to long-term needs. Lower income taxes and tax-free earnings can potentially add up to a lot of money saved!