TFSA: The perfect emergency fund

Consider using your TFSA as a place to stash your money for any unpredictable events.



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The best thing about a TFSA is its flexibility. You can take money out of your TFSA at any time for any purpose without losing the contribution room. This makes this account the number one choice for socking away an emergency fund. So even if you take money out in one year, you can put it back the next without affecting that year’s $5,000 contribution limit.

Let’s say you socked away $7,500 in your TFSA so far. Your roof caves in, your car goes bump, your employer decides to chop back your hours through the dog days of summer, so now you’ve got a cash flow problem. Not with your emergency fund in your TFSA you don’t. You can pull as much or as little as you need to keep your budget balanced. Then next year, not only will you be able to put in the normal contribution, you can put back any or all of the money you took out to make ends meet.

The TFSA is a great way for lower-income Canadians to set something extra aside for retirement without having to worry about how it’ll impact on their government benefits. Especially since neither the income earned nor withdrawals from a TFSA affect a person’s eligibility for federal income-tested benefits and credits.

People saving to buy a home will also love the TFSA since there’s no specified repayment plan or tax hit if you miss a repayment, and you can reuse the contribution room for something else once you’ve accomplished your home-buying dream.

Couples who want to income split will love the TFSA because a higher-income spouse can contribute to the TFSA of a lower-income or stay-at-home spouse, without the income earned being attributable to the higher-income spouse.

The TFSA is also the perfect place to park that money you’re eventually going to use to buy a new car, repaint your house, or go on a splendid vacation… any kind of planned spending for a big ticket item.

You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments. Why? Well since all the capital gains inside a TFSA is tax free, it also means any capital loss can’t be claimed to offset your other capital gains.

The big thing to watch for is the fees levied by the FI’s offering the new TFSA. Don’t be so blinded by the tax-free income that you buy your account from some provider who then gouges you with admin and withdrawal fees. They’ll try. It’s up to you to make sure they don’t succeed on your back.

3 comments on “TFSA: The perfect emergency fund

  1. Gail – thanks for the article. I try to max out my TFSA contribution each year. However, the first year the TFSA was established it was not clear (at least not to me) that you could invest in any type of investment similar to an RRSP, so I placed me contribution in a GIC. Since them I have learned more about TFSAs and now make, what I believe to be better investments.

    However, something I learned the hard way was to be sure to ask up front what the transfer fees are if you set up a TFSA as a GIC with a banking institution. Transferring it out of the bank to, for example, a mutual fund, ends up costing you $100 as a transfer fee. Of course this was never disclosed when setting up the TFSA. They were very happy to get my money but not happy to see if transferred out of their institution AND I was not happy to pay the $100 fee, but better to pay it now and get it into an income generating fund so I can start to recoup the $100 fee and hopefully more in the coming year.

    Also as an individual,educate yourself about the ins and outs of a TFSA. A major bank told me (just last week) that it would be better for me to withdraw the funds from my TFSA instead of transferring them. Fortunately I knew that if I withdrew them I would have to wait until the next calendar year before I could to replace them into a TFSA. So educate yourself, and ask about fees before giving anyone your money for a TFSA or for that matter for any other investment.


  2. Hi Gail, it's true that one of the advantages of the TFSA is the fact that it's liquid and can be tapped into at anytime (which makes it an ideal spot to park emergency cash). But that's also a downfall. Those who lack willpower (aka, moi) will be tempted to 'borrow' from it in case of non emergencies (as I recently did from my $6000 cushion for something that wasn't a luxury but not a necessity either). I've been saving for a little over a year and I feel like I'm waiting for the other shoe to drop…I'm worried that one day I'll lose it and go on a shopping spree. Any advice for those with good intentions but also have moments of weakness?


  3. Is it typical for a Financial Advisor to charge their fees within a TFSA? We want to have the fees deducted outside of the TFSA account but have been told this is not usual practice.


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