I’ve had a few people ask about the Tax Free Savings Account, or TFSA. Some get the wrong idea because of the term “savings account”. While you can hold a savings account in the TFSA, you could also use it for stocks, mutual funds, bonds, GICs, etc. The TFSA is basically a shell similar to an RRSP. They both allow you to grow your investment without taxes. Where they differ is when you put money in and when you take it out. With an RRSP, you get a tax refund for money that you put into the plan and then pay tax on the money you withdraw at retirement. With a TFSA you do not get a refund when you put money in, but do not pay any tax when you withdraw money. You also don’t lose your contribution room when you withdraw from a TFSA, you can deposit that amount back in the next year.
For this first year that it’s available, I actually do plan to open a high interest savings account in my TFSA to set up an emergency fund, but this is not the most efficient use of a TFSA as a tax strategy. Since you do not pay taxes on your withdrawal, it is better to have high yielding investments in your TFSA since the expected larger sum will be tax free. With this logic, placing lower yielding investments like bonds and GICs into RRSPs make more sense. You’ll still get the same tax refund for the dollars you put in and when you have to pay tax at retirement it won’t be as high as with stocks or REITs.
One more thing I really like about the TFSA is its use as a income tax shelter. If you were to purchase REITs and other income trusts in your TFSA, you could withdraw the payments they make as a continual tax-free income. If you are pushing your contribution limits, I wouldn’t advise including dividend paying stocks since they are quite tax efficient and the best candidate to be outside of both RRSPs and TFSAs.
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Tom Drake is the owner and head writer of Canadian Finance Blog.
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Great article about TFSAs. I would like to know what the tax implications are for TFSAs when it comes to leaving a beneficiary or leaving the TFSA to you estate in the end?
i’d love to talk to someone who’s had trouble with a TFSA for a quick TV interview. please email me at charlsie.agro@cbc.ca
thanks!!
Smac20, if the beneficiary is a spouse or common-law partner, the TFSA remains intact and tax-exempt. If someone else is designated, the TFSA will no longer exist, but the portfolio’s growth will have been tax-free up to that point.
Is there a TFSA equivalent in the US?
.-= Tony´s last blog ..Open Savings Account Online =-.
Roth IRA is the US version which was likely the model ours was styled after.
Hi Tom does a TFSA have a limit to what it is not taxed at? Is it similar to the ISA in the UK that allows you to earn interest on up to £3600 a year tax free?
SE,
There is the $5000 a year limit on what can be put in, but no limits on how much you can make without paying tax. Any interest, dividends, capital gains, etc. are tax free.
Hi Tom
Any thoughts on which financial instititution would be best for stocks TFSA? i see the banks on higher side of fee and questrade being cheap but at the same time, is quest trade reliable? why people still go to banks if questtrade is cheaper? any thoughts
see the banks on higher side of fee and questrade being cheap but at the same time, is quest trade reliable..Savings Guidance
Further, it was the demand for and supplies of stocks of money that determined interest rates in the short run. Thus, saving could exceed investment for significant amounts of time, causing a general glut and a recession.
Savings
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Christina
Is still this article up to date ?
Hi there, Great article. Finally understand the difference between TFSA and RRSP.
Probably you have answered this, but to clarify, if I put $5000 into a TFSA and invest in (non-dividend) stocks, and the return grows the $5000 to $5500 during the same year, is the $500 taxed because its over the $5000 limit? In other words, does the limitation only apply to the original investment?
Thanks,
Virginia