What to Teach Your 18-Year old About Opening a TFSA

It’s not easy getting your teen interested in the idea of investing in their future. Most teens have a shorter attention span and are rarely focused on long-term goals — they’re thinking about the present. This can make it somewhat difficult to explain the benefits of saving, especially if most of the financial terms go straight over their head.

If your teen has turned 18, it’s time to start teaching them about TFSAs. 18 is the age when Canadians can begin opening and using TFSAs, and with compounding interest, it’s wise for them to start early and do just that.

With the right words and some guidance, you can help them grow a future nest egg as they ease into adulthood. But where to begin? Here are five things you can teach your 18-year old today about opening a TFSA.

The Art of Compounding

If you start early, the power of compounding can add up to millions of dollars over the long-term. If that won’t get your teen’s attention, nothing will. Once they are interested in what you have to say, that’s when you shock them with the long-term benefits of a TFSA. The best way to make them understand is to show them a real-life example of how much money they can expect to earn in 20, 30, 40, and even 50 years when they start making small contributions each month, starting now. When they see the power of compounding in action, it’s sure to get them excited about forming a long-term strategy that invests heavily in their future.

The Benefit of Tax Savings

It’s unlikely that your teen knows much about taxes or how they will impact their savings over time (and if they do, great for them!). That’s why now is the best time to teach them about tax-sheltered instruments, like a TFSA. They may not fully understand all the tax jargon in relation to capital gains, interest earned, or Canadian dividends. Hone in on the fact that with a TFSA, they can withdraw their money tax-free — unlike the majority of banking accounts. They’ll appreciate the idea of avoiding fees and having more money in their pockets.

How to Maximize Contributions Without Penalties

Accidentally contributing more than $5500 a year may result in penalties. It’s essential to teach your 18-year old about the maximum contributions and how they can add to their account without acquiring fees. For instance, if they were to contribute the full $5500 in one year, they could have to wait a full calendar year before putting more money into the account. Your teen can contribute to their TFSA for every year that they have been at least 18 since 2009, as illustrated here. An example of this would be if you have a son who turned 18 in 2016 and is just opening a TFSA now, he would actually be eligible to contribute $16,500 right away.

How to Be Smart With Their Money

Unlike an RRSP, money can be withdrawn from TFSA at any time without paying taxes. This could be a concern if you invest in your teen’s savings account and they withdraw the money straight away. That’s why it’s important to teach them how to be smart with their money, why a long-term goal is better than short-term gains, and that a TFSA is an investment tool more than a savings account.  You may even consider teaching them how to use their TFSA to purchase mutual funds, GICs, and other investment accounts to help grow their money, not just save it. The more they know now, the better choices they will make in the future.

If you’re not sure how to discuss TFSAs with your teen, we can help. At The Beacon Group of Assante Financial Management Ltd., we manage not only our client’s wealth plans but also their children’s investments too. We can teach them the benefits of long-term objectives and what the right choices are for investments with a particular goal in mind. To learn more about our family wealth planning, contact us today.