What is a TFSA?
Tax Free Savings Accounts (TFSAs) are often touted as a great way to put money aside or invest while making sure any interest, dividends and capital gains earned can grow tax-free.
They’re a more flexible option than long-term savings vehicles like RRSPs, which give you tax breaks when you put money in, but come with tax consequences when you take that cash out, either from the RRSP itself or after it’s converted to a RRIF.
“TFSA is kind of like an umbrella; it can sit overtop of your investments to avoid tax,” says Jason Heath, an advice- and fee-only certified financial planner at Objective Financial Partners Inc. in Markham, Ont. “They’re good for just about anyone.”
TFSAs can also be a better alternative than an RRSP for people who expect their future income to be higher than their current earnings, since those folks are less likely to benefit from the tax deductions that come with an RRSP while making small contributions, but would pay more in taxes when it comes time to withdraw at a higher tax bracket in the future, when their wealth has grown.
TFSAs meanwhile, “are tax-free from A-Z.”
How do you start or open a TFSA?
Any Canadian citizen aged 18 and over can open a TFSA by contacting their bank, credit union or numerous other financial institutions. There’s no minimum balance required to maintain a TFSA – you can open one by depositing as little as $25. All you need is identification with your name and date of birth as well as your social insurance number. Your account will need to be registered with the Canada Revenue Agency for the income earned within the TFSA to be sheltered.
You can have more than one TFSA, but the amount of money you contribute to all these accounts can’t exceed the total available TFSA contribution room, which accumulates over the years you don’t contribute.
A TFSA can be self-directed (if you want to buy and sell investments on your own) or you can ask to have a professional handle it, although most investment advisors will likely require a minimum balance and you’ll be paying for their expertise. A robo-advisor could also help and would be less costly than an advisor.
Who is a TFSA best suited for?
Since TFSAs have flexible withdrawal rules and don’t require a minimum balance, they’re often targeted at younger investors who may be saving for a home or another big purchase.
But they can also be good for long-term retirement savings, and work alongside an RRSP.
“Certainly somebody who has a lot of taxable investments and has a high net worth benefits from being able to use a TFSA,” says Heath.
And since withdrawals from your TFSA don’t count as taxable income, they don’t affect eligibility for government tax benefits like Old Age Security or the Guaranteed Income Supplement.
“Some of the preconceived notions about where to save and how to save could be hurting people if they’re not looking at things with a broad banner.
It’s not one or the other, you can have both and they can complement each other.”