Part 2: Tax-Free Savings Accounts

Part 2: Tax-Free Savings Accounts

In short, Tax Free Savings Accounts (TFSAs) are a special type of savings account that you can open at your financial institution to hold funds that can grow tax-free – i.e. you will not receive a tax slip at the end of the year and you won’t have to add any income from the account on your tax return. Although it has the word "account" in the name, it does not have to be a savings account at your bank with cash sitting there earning a little bit of interest every month. You can hold almost any type of investment in a TFSA, no different than a Registered Retirement Savings Plan (RRSP). And, similar to an RRSP, you can only contribute so much money per year to your TFSA.

The main differences from an RRSP are that you do not receive a tax deduction when you contribute to a TFSA and you do not pay tax on any withdrawals from your TFSA.  So in the end, the TFSA will not affect your tax return whatsoever as long as it is not used improperly (i.e. you contribute too much). For all the details on TFSAs, head on over to the Canada Revenue Agency’s (CRA) TFSA page. There is a link on CRA’s page that lists the contribution limits by year, which will be helpful in figuring out how much you can put in to your TFSA if you have never used one yet.

TFSAs are best suited for short-term savings because you can still invest in things that give you a return that is far greater than the “high interest” bank accounts offered right now. This includes mutual funds as well as individual stocks and bonds.  Your money can always be withdrawn, at any time, without withholding taxes being taken off or worries about your tax bracket that year. Just keep in mind there may still be transaction fees or commissions owing on the sale of mutual funds.

There are also specific situations where higher-income seniors could benefit from using their TFSA to accumulate excess funds withdrawn from their RRSP. The specifics of these situations get a little technical and are heavy on math, so I won't go into detail here. I just wanted to point out that TFSAs are incredibly useful for people of all ages.

That is essentially all you need to know about TFSAs. They are relatively simple and are a great tool to use when you want to save for that big expenditure coming up or even just for “rainy day” savings. For a rundown on RRSPs, check out Part 3.

*The blogs posted on this website provide information of a general nature and should not be considered specific advice. Please contact a professional accountant prior to acting upon or implementing any of the information included in the blogs.