Tax Free Investing – TFSAs 101

If you were a resident of Canada, aged 18 in 2009 until today, did you know you had the opportunity to save thousands of dollars in a tax free account?

TFSA facts

  • The Tax Free Savings Account (TFSA) is a misnomer.  Read why here.  A TFSA can be much more than a cash savings account.
  • The TFSA is an account, not a mutual fund.
  • There are no such things as a spousal TFSA or group TFSA.
  • Contributions to your TFSA are not tax deductible, so you cannot use contributions to reduce your taxable income.
  • TFSAs are highly effective for every Canadian regardless of their tax bracket.
  • After you select investments for the account, the income you earn on those investments inside the TFSA can grow tax-free.
  • If/when you decide to take money out of the account, money can be withdrawn tax-free.
  • Contributions to a TFSA can occur throughout the year.
  • There are contribution limits for a TFSA, and most Canadians should strive to maximize their TFSA contributions.
  • Contribution limits have nothing to do with your annual income.
  • There are penalties if you over-contribute to your TFSA.
  • Unused TFSA contribution room can be carried forward in future calendar years.
  • You can be as rich as you think:  if/when you take money out of the account you do not have to pay tax on it.
  • If you want to contribute investments “in-kind” to your TFSA, you can, but you are considered to have sold investments for their fair market value before doing so and may need to pay a capital gain.
  • Every adult Canadian should take advantage of the TFSA.

These are just some of the TFSA facts.

Why TFSAs should matter to you

As referenced above, there are a couple great tax benefits TFSAs provide Canadian investors:  income on investments inside the TFSA can grow tax-free and if/when you decide to withdraw money from this account, you can do so tax-free.  Unlike RRSPs where major benefit is tax-deferred growth, every Canadian should own a TFSA and consider using this account for more than a cash savings account.  For most Canadians, to realize the major benefits of this account, they should strive to maximize their TFSA contributions every year, have a bias for low-cost, diversified investments inside this account and avoid making withdrawals from this account for as long as possible.  For further reading, check out this post here.  Want to read about the power of the TFSA in only a few short years?  Check these TFSA investing all-stars here.

Do you own a TFSA?  If so, what do you use this account for?  If not, what are you waiting for?

Filed in: Financial Terms 101, TFSA

14 Responses to "Tax Free Investing – TFSAs 101"

  1. I have a TFSA. I opened it a few years ago, and so far I’ve been loving it. I encouraged my brother and fiance to open one shortly after I did, and they both did as well. We have all been contributing to our TFSA regularly.

  2. Doc says:

    My wife and I have maxed out our TFSAs each year. We have a good selection of dividend stocks in them as well as one years worth GICs short term. We are within a couple of years of converting some small RRSPs so the TFSAs are the sliced bread of our savings now. We are retired on pension and don’t need the money at the moment so we feel this is the best thing they have come out with. Keep up the good work and info Mark.

  3. Sounds like a great plan Doc. My wife and I are trying to ensure our TFSAs are maxed out every year. Mine is done for 2013, wife’s is getting there.

    We hold ETFs, REITs and CDN dividend stocks in ours.

    As a retiree on a pension, I think any RRSP withdrawals and money you don’t need, should go into TFSA. This way, as you get older, TFSA withdrawals are not income-tested and TFSAs can continue to churn out income for you.

    Well done.

  4. Smart stuff Daisy, keep up the great work.

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