The Tax-Free Savings Account (TFSA) lets you save money for just about whatever you want without paying any tax on the growth within the account or on withdrawals.
Since the TFSA is relatively new (it became available in 2009), many Canadians are still unaware of its existence entirely. Here are five points to help you better understand TFSAs and how they can be of use to you.
Don’t stop at just throwing your extra pennies in the account, almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into your TFSA: bonds, stocks, mutual funds, exchange-traded funds, options, etc.
Many Canadians still use the TFSA as a conventional savings account, making regular withdrawals and deposits. If their total of all deposits exceeded the annual limit, they have made an over-contribution.
If you deposit $10,000 and then withdraw it and deposit again in the same year, you are considered to have contributed $20,000 — keep this in mind. Also be aware that moving a TFSA from one financial institution to another (by withdrawing, then re-depositing) may trigger an accidental over-contribution.
You can use a TFSA for even relatively modest savings. You will be able to access the money at any time. This also makes a TFSA perfect to use as an emergency fund. You will have the security of knowing the money will be available if you need it.
There are several ways to make the TFSA and RRSP work together to improve your financial standing. RRSPs are the recommended choice for long-term goals such as retirement, while TFSAs work better for short-term objectives.