What the heck is a TFSA? - MoneySense

What the heck is a TFSA?

A tax-free savings account should really be called is a tax-free investment account—because it allows you to hold not only savings, but also equities like stocks, mutual funds, GICs, bonds and ETFs.

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Photo by Joseph Gruenthal on Unsplash

One of the side-effects of working for a personal finance magazine is that my buds good-naturedly ask me for advice. I always oblige, albeit sheepishly, without letting on that I’m still learning, too (which I freely admit here).

For instance, the other day I was having lunch with some friends when we started talking about money. The exchange went something like this:

Friend: Ugh, I’m so lost when it comes to money. What should I do?

One of the greatest mistakes young people can make right now (other than blow their money on something stupid, like, say, a house in Toronto) is not realize that their money can do more than just sit there.

Me: Well, do you have a TFSA?

Friend: Yes (in a proud voice)

Me: That’s great, you’re ahead of the game. What are you investing in?

Friend: W-w-what?

I then went on to explain what a TFSA* really is. The tax-free savings account is NOT, I repeat, NOT just a savings account.


Compare the Best TFSA Savings Accounts in Canada*


Alright, then, what is a TFSA?

A tax-free savings account (TFSA) should really be called is a tax-free INVESTMENT account. That’s because it is a registered account that allows you to hold not only savings, but also equities like stocks, mutual funds, GICs*, bonds and ETFs. Inside a TFSA*, all of your investments grow tax-free. Another bonus? Unlike with a Registered Retirement Savings Account (RRSP*), when you withdraw funds from your TFSA, you aren’t on the hook for taxes. That’s right: You don’t pay taxes on the growth inside your TFSA, and you don’t pay taxes when you take your money out of it.

Who can have a TFSA?

Any Canadian over the age of 18 who has a valid social insurance number (SIN) is eligible to save or invest in a TFSA*.

How much can I invest inside a TFSA?

If you’re asking, what’s the catch, well, there isn’t one unless you count the yearly limit for the amount of money you can deposit into the TFSA* (although that limit grows annually). Each year, the federal government announces what the annual maximum contribution is; for 2020, it’s $6,000. If you miss a year, or don’t make the maximum contribution, your unused contribution room can be rolled over into future years. So if you turned 18 before 2009, the first year TFSAs were made available, your current lifetime maximum contribution room is $69,500. When you withdraw money from your TFSA, that exact amount becomes available to you to contribute as of the next calendar year. So, let’s say you withdraw $4,000 this year to fund a minor home renovation; in 2021, you’ll be able to contribute that year’s announced maximum, plus the $4,000 you withdrew in 2020. (For a more precise look at how much you can contribute, enter your digits into our TFSA contribution room calculator.)

What should I use my TFSA for?

The great thing about TFSAs* that’s particularly helpful for young people with shorter-term savings goals is that you can withdraw the money at any time without getting dinged or taxed or levied in any way. Pretty sweet.

I opened up a TFSA in high school at the behest of my father. Growing up, we’d seen financial hardship and he didn’t want me to have the late savings start that he did when he came to Canada in his mid-30s, family in tow. I bought some mutual funds and contributed $25, then $50 a month from my meagre part-time-job paycheques. I can’t say I paid much attention or really cared about the growth I was seeing. But I felt good knowing that I was doing something. And it was comforting in my panic in university when I was certain I would graduate, then be unemployed and have no income.

I was lucky to have my father instil the importance of growing my money at that age, so I was aware of the investing powers of the tax-free SAVINGS account.

If you’re a newbie (like me) and this is new information to you, go forth and buy some investments! Your TFSA could be growing your money, not just hoarding it for safekeeping.


Compare the Best TFSA Savings Accounts in Canada*


MORE ABOUT TFSAs