TFSA: The Gen Z’s and millennials’ friend

The Tax-Free Savings Account (TFSA) is often called the Swiss army knife of financial accounts since it can be used for so many different purposes. Also, A TFSA can meet the specific needs of different age groups.

Using a TFSA

Here are some key ways millennials and older Generation Z members can make a TFSA an essential component of their wealth plan.

Saving for your first home. If you're able to max out your contributions to a First Home Savings Account (FHSA), you could then use your TFSA to help save for a down payment.

Funding a child's education. If you have TFSA savings when you first open a Registered Education Savings Plan (RESP), you may want to withdraw TFSA assets to help fund the RESP.

The costs of post-secondary tuition and student housing continue to rise, so you may want to supplement your RESP with TFSA funds dedicated to education expenses.

Meeting short-term goals. You could keep a pool of lower-risk investments in your TFSA to meet short-term goals, such as taking a vacation or renovating your kitchen. After you withdraw the funds, you can work toward replenishing the pool.

Saving for retirement. When saving for retirement, if you're ever deciding between a TFSA and a Registered Retirement Savings Plan (RRSP), the choice is typically based on your marginal tax rate. If your tax rate when you withdraw funds in retirement will be higher than your rate when you contribute, then a TFSA outperforms an RRSP. Conversely, an RRSP wins out when your rate upon withdrawing funds will be lower than when you contribute.

If you're unsure how your tax rate in retirement will compare to your current rate, you might consider contributing equal amounts to both a TFSA and RRSP.

Meeting multiple goals

Whenever you wish to meet two or more goals at the same time with a TFSA, here are some choices.

You can designate specific TFSA investments toward each goal. Perhaps an investor uses a money market fund to prepare for any financial emergencies and currently invests in a balanced fund to complement their RESP.

A couple can designate each spouse's TFSA toward meeting one specific goal.

Some investors open a second TFSA either to more easily monitor their progress toward a goal or to establish a TFSA they intend to leave untouched, such as an account for retirement savings.