6 Things You Should Know About Tax-Free Savings Accounts

Written by Kira Vermond

(4 min read)

Go on, admit it. You’ve read the acronym TFSA and terms like “contribution room” thrown around before, but have never given it much thought. After all, it sounds kind of boring, right? 

Not so fast! TFSA stands for Tax-Free Savings Account – and who doesn’t love the word “free?” Besides, what you can do with one is actually pretty exciting. 

Unlike a Registered Retirement Savings Plan (RRSP), which allows you to defer paying tax on your savings investments until you withdraw them at a later date – ideally, when you’re in a lower tax bracket and will pay less tax – a TFSA turns that model on its head. Sure, you pay tax on your money the year you earn it – but once it’s invested in a TFSA, your earnings can grow tax-free. Think interest, dividends and capital gains (typically, you would pay taxes on what you earn). 

It’s a sweet deal, particularly if the investments held inside a TFSA take off and earn you serious money. 

The TFSA was launched in 2009 by the government as a way to help everyone save for retirement. Until then, RRSPs were great for people in higher tax brackets but didn’t do much for lower-earning folks who weren’t paying much tax anyway. TFSAs, however, give everybody a fair shake at a tax break. 

Ready to find out how a TFSA can help you save your money tax-free? Here are six things you need to know to get started.

1. TFSAs are flexible. 

Although TFSAs were originally created to give people another way to save for retirement, that’s only one way to use them. You can use your TFSA to save for a number of big-ticket items: a new car, home renovation, emergency fund or even a dream vacation. 

Want to save for a down payment on a first home though? An RRSP is probably your better bet. You can withdraw funds – up to $35,000 – through the Home Buyers’ Plan and avoid paying fees. 

2. They’re simple to open.

If you’re a Canadian resident with a Social Insurance Number (SIN) and meet the age of requirement – which is usually 18 – you’re pretty much good to go. You can open a TFSA through a bank, trust company, credit union, investment firm or insurance company. You’re even able to open one online or through different mobile apps now!

3. There’s a TFSA vehicle that matches your risk tolerance.

The term, “Tax-Free Savings Account” is a bit of a misnomer. It really should be called a Tax-Free Investment Account, and for good reason. There are all types of investments that can be held within a TFSA, from low-risk GICs to long-shot penny stocks, mutual funds and everything in-between. 

That means if you’re saving for retirement and have, what financial experts call, a long time horizon, you can probably take on a bit more risk since your investments have more time to recover if stock markets tank for a year or two. But if you’re saving for a, say, vacation to Belize next year, you’ll obviously want something safer. 

4. The magic number is $6,000.

It’s true. The TFSA contribution limit (how much money you’re allowed to save) is $6,000 per year as of 2019. 

5. It’s cumulative.

In other words, if you don’t use up your yearly limit, any unused contributions can be carried forward year after year. For instance, say you turned 18 before 2009 and still have never contributed to a TFSA, you’ll have lots of room now to load up (you can check this on your Canada Revenue Agency account). What’s more, if you withdraw some money one year, you don’t lose access to that room. You can fill it again at a later date. 

6. But be careful.

Be sure you understand all the TFSA rules around withdrawals and contributions. What to remember: once you withdraw your money, you can’t pay it back again until the following year, otherwise the Canada Revenue Agency (CRA) can impose heavy tax penalties. And that’s definitely something that would take the “free” out of your TFSA.

Check out the Government of Canada’s complete guidelines for TFSA for detailed information.

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