The benefits of tax-free savings accounts

Hey there, time traveller!
This article was published 29/11/2023 (1025 days ago), so information in it may no longer be current.

Dear Money Lady Readers,

Most people know that they should include a tax-free saving account(TFSA) in their investment portfolio. But why is it so important? Do you really need one?

The answer is yes. If you have to choose between a TFSA or an RRSP then I want you to choose the TFSA — and if you can do both, that would be the best. Everyone over 18 should have a TFSA. So, what is it?

TFSAs first became available in 2009 and since then there has been a different contribution limit each year. If you were at least 18 years of age in 2009 you could contribute the accumulated amounts from 2009 to now, (approximately $88,000). The greatest feature of a TFSA is that you can invest those contributed savings into anything you like and the growth is tax-free and can be withdrawn from the account at any time without penalty. Because TFSAs are tax-exempt they make it easier to save for retirement or even to save for large future purchases, such as your first home. They will not provide the immediate tax breaks like investing in an RSP, but must remember that all withdraws from your RSP are taxable. A TFSA is not taxed when you take it out in the future. That’s the key – you already paid taxes on that money you put in and therefore you don’t pay taxes again when you take money out. One thing to keep in mind, though, when you are investing those funds is that losing money on the investment of your choice does not give you extra contribution room.

One thing I want to caution you on with TFSAs – you can open up as many as you like at multiple banks and investment firms. But be careful, because you never want to exceed the contribution limits. Personally, I think it’s better to just have one TFSA that holds all your savings so you can capture a higher rate of return with a higher investment balance. For those of you who like to day-trade – you can’t use a TFSA to day-trade, it’s prohibited.

To figure out how much you can save, talk to your banker and they will determine how much contribution room you may have since the 2009 inception. The best method to save would be to combine your contributions with a RRSP and a TFSA.

Why not contribute to your RSP each year to get the income tax advantage and then, when you receive your refund, put this amount into your TFSA. That way you’re covering both plans and you’ll be well on your way to creating a great retirement for yourself in the future. Don’t forget to make sure you designate a beneficiary to your RSP and your new TFSA. If you pass away and you chose your spouse or common-law partner as a beneficiary to your RSP there will be no tax implications (automatic spousal rollover) and with the TFSA, there would be no taxation for any beneficiary.