Tax Free Savings Account

The Tax Free Savings Account (TFSA) has been around since 2009, yet many people still don’t fully understand this savings product.  Here are few common misperceptions:

  1.  I can only put in $5K, so my income, and hence tax savings, would be minimal, so what’s the point?  Well, sure in 2009 that was true, but that $5K was per year, was indexed to inflation, and was increased to $10K per year in this last Federal budget.  So if you haven’t yet put any money into your TFSA to date, you should now be able to contribute $41,000! 
  2. But I can only get minimal interest income on my money.  For whatever reason TFSA’s seem to be marketed like a cash savings account with great introductory interest rates.  The reality is you can invest within your TFSA just like you do in your RRSP.  So if you invest the cash in your TFSA in equities, then you can in fact get a much higher return than interest rates, all tax free.
  3. TFSA’s are great because I can pull out my money at any time without penalty.  While this is technically true, there are two things to watch out for here.  One, if you pull out the money, you have to wait until next year to re-contribute it, otherwise, if you don’t have the TFSA room, you will face a penalty tax on an over-contribution.  Though this seems unfair and silly, presumably the law has been structured this way so that CRA can properly track your contributions and withdrawals year over year.  Two, if you’re going to contribute to a TFSA and just pull it out to buy the new fancy toy every few years, it sort of defeats the purpose of using your TFSA for a retirement savings vehicle.  In this respect the RRSP may be the better choice for you because you save taxes on the contribution, and there is a penalty for withdrawing the funds, thus giving an incentive to keep your money saved.  But the choice of whether you should buy TFSA or RRSP really depends on your specific situation, so best is to get help from an accredited financial

For more information on TFSA’s visit