Money Management Tip:

TFSA (tax free savings account) was introduced to Canadians in 2009 to help save more and yet it is still not well known or understood as other tools like RRSP (registered retirement savings program). It is a tax sheltered investment account that can hold cash, mutual funds, exchange-traded funds, index funds, exempt market securities, and GICs(guaranteed investment certificates). Unlike RRSPs, TFSA contributions will not help you pay less taxes up front through a tax deduction. Therefore, TFSA withdrawals are not subject to tax, whereas RRSP withdrawals are taxable and is treated as income in the year the withdrawal is made.

There is an annual contribution limit with the TFSA and you are penalized if you over contribute above the limit. The contribution limit is cumulative – if you don’t deposit the maximum in one year, you can catch up in following years. Once the money goes into a TFSA, the growth is exempt from income tax whether a withdrawal is made or the money is left in the account. 

As the main reason for using a TFSA is to not pay tax on any gains, it would be more sensible to invest in stocks, mutual funds, and exchange traded funds that have higher yields. Higher yield does not necessarily mean high risk. However, many Canadians get confused by the name of the account and open up a savings account at their bank that earn low interest rates. Another mistake made often is the frequent withdrawals and deposits made on the account like a
regular bank account. Any withdrawals made cannot be replaced until the following calendar year.

The ease of making frequent withdrawals make it less ideal for saving long term for retirement. If you want to move money in and out often or want to set up an emergency fund, it’s probably better that you set up a high-interest savings account. Treat the TFSA as an investment account for long term savings goals and get advice in selecting the right investment.