It’s been over a decade since Canada introduced the TFSA, but some Canadians still don’t fully understand what this savings account is about. When the tax-free savings account (TFSA) was introduced in 2009, it was thought of by many individuals as a secondary savings account where people could save short-term cash. Few people, however, realized the greater benefits of the TFSA.
Since its introduction, the TFSA’s annual contribution limit has increased. The contribution limit started at $5,00, then rose to $5,500 in 2013, $6,000 in 2019, and $6,500 in 2023.
Clinton Orr is a financial advisor with CG Wealth Management and has nearly 20 years of experience in the financial management industry. He advises his clients on their financial futures, as well as providing insights on various topics for his local paper, the Clipper Weekly.
“The TFSA has a number of functions that many Canadians may not be aware of,” says Orr. “However, there are things you need to know when it comes to making the best use of your TFSA.”
TFSA is for much more than just cash
As mentioned, when the TFSA was first introduced, most people saw it as just another savings account, because of the nature of its name. So, some people were confused and thought it was limited to savings. Over the years, though, Canadians are starting to realize that virtually any investment that can be held inside an RRSP can be held in a TFSA, that includes stocks, bonds, mutual funds, and more long-term investments. You can even put long-term retirement assets into it.
“Holding stocks and the like in a TFSA can make sense depending on your personal financial situation,” explains Orr. “Having said that, speaking with a financial professional can help you better determine whether or not it’s best for you to hold stocks, bonds, or other investments in which account is more viable for you.”
Unlike RRSPs, TFSAs allow for tax-free growth
The single biggest benefit of a TFSA is that all of the growth of your assets within it is tax-free — that includes interest, dividends, and capital gains.
“You won’t have to pay a penny in income tax even when you withdraw from your account, or sell the assets in your TFSA,” explains Orr. “While investments in an RRSP are also not subject to tax while they grow within the account, as soon as you withdraw from an RRSP, it’s treated as income and taxed accordingly.”
The TFSA is great for short-term goals
Additionally, the TFSA is an ideal tool for short-term goals. Whether that’s saving for a vacation, a down payment on a house, or an emergency fund, the TFSA provides a tax-free environment for these savings. Unlike other savings accounts, the TFSA offers the ability to earn interest or investment returns without having to pay up the tax.
“Your individual savings goals are going to vary over time, but the TFSA offers a great opportunity to save up for shorter-term goals while receiving the benefit of not having to pay tax on those funds,” says Orr. “It’s beneficial to take a look at your comprehensive financial plan before making a decision on how to utilize short-term funds.”
The Tax-Free Savings Account provides Canadians with a valuable means to save and invest money while enjoying tax-free growth and withdrawals. Its flexibility, long-term savings potential, and suitability for short-term goals make it a highly beneficial financial tool for individuals and families. However, each financial situation is different, so choosing the account that is right for your goals will depend largely on your own personal circumstances.
“It pays to have a plan in place and to re-evaluate yearly to make sure you’re on track,” says Orr. “Talk to your financial professionals to make sure your plan is up to date.”