The TFSA couldn’t have come at a worse time. When it launched on January 2, 2009, the market was in a tailspin and only the craziest Canadians still wanted to invest. It could have been a complete disaster, but instead the new savings vehicle chugged along, growing slowly each day. Wary investors opened accounts to stash the money they pulled out of riskier products, while others decided the freedom of a TFSA was better than the uncertainty of a standard mutual fund investment. According to the Bank of Montreal, 12 months after its birth 20% of us opened an account. Not bad — though the numbers may have been higher if the economy wasn’t crashing.

Those who invested chose to play it safe — really safe. The BMO report revealed that 94% of TFSA holders kept their funds in low-risk savings accounts or term deposits. That’s not so great if you actually wanted to grow your savings.

So, a year later, the TFSA lives on, but, clearly, it’ll be some time still before Canadians see its full potential. What I find most exciting about the TFSA is that contribution room accumulates every year whether you invest or not. For those who decided to keep their cash hidden in their closet last year, they can actually put $10,000 in their account in 2010. That opens up more investment options, which is a good thing as long as the TSX continues to climb.

In 2008 and 2009, MoneySense wrote plenty of stories on the tax-free savings account. Here’s a list of some of those articles. Take a look and maybe you’ll figure out how to make some money before the TFSA turns two.

TFSA: A new piggy bank
How to make the most of your TFSA

The perfect piggy bank
The Tax-Free Savings Account may make savings cool again.

A better RRSP?
It looks puny, but the new tax-free savings account could be the best way to save for your retirement.

Deposit dilemma
Will the new tax-free savings account spell the end of the RRSP?

Here are the basics: Anyone over 18 can invest up to $5,000 a year in a TFSA. You can put your money into a savings account, GIC, stocks, bonds or mutual funds. No, you don’t get a tax break for contributing money, as you do with an RRSP, but your money grows tax free inside the TFSA—and, unlike an RRSP, when you withdraw your money, you don’t pay a penny of tax. This can have very nice effects. If you contribute $200 a month to a TFSA for 20 years at an average annual return of 5.5%, you’ll amass $11,045 more than you would in a taxable account. That makes for one fat piggy bank.

Unfortunately, TFSAs have their pitfalls. How do you avoid them? Just follow our TFSA do’s and don’ts:

Do use TFSAs for fixed income investments. David Stewart, a financial adviser at Stewart & Kett in Toronto, recommends using your TFSA primarily for GICs or bonds since the interest you earn on these investments would ordinarily be heavily taxed. It makes less sense to hold equities in a TFSA since capital gains on stocks already enjoy tax advantages. So do dividendsfrom Canadian companies.

Don’t ignore fees. Some brokerage firms are charging hefty fees to manage TFSAs, so it pays to shop around. At BMO Nesbitt Burns and BMO InvestorLine, you’ll pay a $50 annual administration fee as well as withdrawal fees that range from $15 to $25. In contrast, most banks charge no fees if you put your TFSA money into a savings account or GIC. You can find other no-fee deals at E-Trade Canada, TD Mutual Funds and ING Direct.

Don’t treat your TFSA as a rainy-day fund. The big payoff from a TFSA comes in the long run, after your investments have doubled and tripled in value. At that point, a TFSA can save you thousands of dollars a year in tax. On the other hand, if you dip into your TFSA account every few years to buy a car or repair the leaky roof, you blow the benefits. A TFSA “will simply not shelter much of your money from taxes if you use them as an emergency account,” says Gordon Pape, author of Tax-Free Savings Accounts:A Guide to TFSAs and How They Can Make You Rich. Assume you’ve invested $5,000 in a TFSA savings account at 3%. If you take the money out in two years to buy a car, your tax savings add up to, at most, $96. A better way to get that kind of return: just skip that daily coffee at Tim Hortons for a couple of months.

But, even with myriad investment options, the Aylmer, Que. resident is planning to open a new tax-free savings account come January. “It just makes sense that any money you have left over you put into the TFSA,” he says.

If you haven’t seen the all the ads touting the TFSA’s value, here’s a quick primer: the TFSA was introduced by the Conservative government in the last federal budget. It allows Canadians over 18 to invest up to $5,000 a year, tax-free in an investment account. Picture an RRSP without the tax implications. That means there’s no pesky capital gains and don’t worry about claiming anything on an income tax return when you withdraw your cash. The contribution room also accumulates — if you don’t save the max in 2009 you can load up the TFSA with $10,000 the next year.

It’s a great way to save and most financial institutions are already letting their clients open accounts, though contributions can’t be made until January 2. But, having a savings vehicle that’s similar to a registered savings plan begs the question — is this the end of the road for the RRSP?

For some Canucks, it is better to park hard-earned dollars in a TFSA rather than an RRSP. Robert Abboud, author of No Regrets, A Common Sense Guide to Achieving and Affording Your Life Goals, says people making $35,000 or less are better off investing in a tax-free account. “There’s a good chance that people in a lower income bracket will always be there, so I’m not sure if an RSP makes much sense anymore.”

Richard Croft, an investment advisor specializing in portfolio construction, agrees with Abboud, but adds people with pensions should also consider using a TFSA instead of an RRSP. “They should use a TFSA and call it a day,” he says. “The RRSP wouldn’t get that big a break, because they have a pension. If there’s extra money they can top up their registered savings plan.”

Another potential nail in the RRSP’s coffin is that many high income earners will continue to earn a lot of money in retirement. With more and more people counting on investment income and working part-time in their golden years, it’s possible some people’s tax brackets won’t fall as much as they think. And, a few rare folks could even bring home more money than usual.

“In a few instances, where the tax rate is higher in retirement — maybe there’s an inheritance — TFSAs will prove to be more beneficial,” explains Patricia Lovett-Reid, senior vice-president of TD Waterhouse Canada. “And, if there won’t be a marginal change in the tax rate, there’s no real difference in the two strategies.”

Clearly, there are situations where using a TFSA is better than an RRSP, but both Abboud and Lovett-Reid think it’s unlikely registered savings accounts are on their last legs. Most people who use RRSPs in their higher earning years will likely benefit when they pull the cash out of their account during retirement. Abboud explains: “If someone is depositing $1,000 today and getting back $460 and later on, when they take out $1,000 and only pay $230, they win. They win by 23%.”

“Financially, they just make sense,” adds Lovett-Reid. “For those looking to put more money back in their pocket, and if they’re going to spend a lot of time in retirement, it’s great. I can’t imagine RRSPs going out of vogue.”

Johnson doesn’t plan on cutting back his RRSP payments after he opens a TFSA. Like the majority of people who will set up an account, he plans to use the contribution room to save extra money that he can pull out without penalty if need be. “I don’t see it as being a huge part of my portfolio,” he says. “I keep money on the side for emergencies, so it would make sense to put that in a TFSA.”

Others might decide to use their new account as way to save for short-term goals, like a vacation or a new car. Either way Lovett-Reid is just happy people have another option to save. With only 7% of Canadians topping up their RRSP room, if there’s another incentive for Canadians to hang on to their money, that’s a good thing. “In a perfect world people would maximize their RRSPs and they’d put their extra money in a TFSA,” she says. “But really, I just want people to save.”

Norm Rothery, MoneySense columnist and chief investment strategist at Dan Hallett & Associates, says the safest harbor may be the lowly savings account. “They are a surprisingly good option,” he says. “If you choose a high-interest account, you’ll often find a better rate than you can get with a money market fund.”

As of early April, banks such as ICICI Bank Canada and credit unions such as Steinbach were offering accounts with annual rates of return higher than 3.5%. Deposits of up to $100,000 are guaranteed by the Canadian Deposit Insurance Corporation at banks such as ICICI, and deposits of any amount are guaranteed at Steinbach by the Credit Union Deposit Guarantee Corporation.

If you want to keep your money inside your trading account, there is another option. Toronto’s Claymore Investments recently launched the Premium Money Market ETF (TSX: CMR), which invests in the same T-bills and commercial paper (but not asset-backed commercial paper) that traditional money market mutual funds do. You can buy the ETF the same way you would a stock on the Toronto Stock Exchange. It charges only 0.25% in annual fees — just one quarter of the median fee charged by money market funds in Canada — and as of early April, it was offering a distribution rate after fees of 3.4%.

The Claymore ETF trades at a set price of $50 at the start of each month, and the price goes up during the month as the fund earns interest. At the end of the month, that interest is paid into your account in cash, and the price resets to $50. You can buy at any point during the month without affecting your return.

Rothery likes the low fee on the Claymore fund, but he still recommends a savings account if you’re sensing an impending apocalypse. “The ETF is not as safe, as it has about half of its money in commercial paper,” he says. “Plus there’s no deposit insurance. So I wouldn’t call it comparable to a bank account.”