Q:
What are the benefits of a TFSA? And is there any downside?
A: TFSAs are fantastic — but before diving in, it's important to understand how they work to be sure the TFSA is the right account choice for you. The Tax-Free Savings Account (TFSA) came into effect in 2009. It's an account type that allows Canadians to save or invest and not pay tax on money they make or withdraw.
The Good:
- As long as you stay within your contribution limit, you're incentivized to make as much money as possible — your gains are tax-free! As are any withdrawals you make. This is incredible!
- They work well for almost any goal, whether short-, mid-, or long-term. For example, a TFSA savings account is perfect as your emergency fund or for the next vacation you're saving for, while a TFSA mutual fund account is great for retirement savings.
- If you withdraw funds from your TFSA, you can re-contribute that amount, plus your new annual limit and any unused contribution room, in the following year.
The Not-So-Good:
- The money is almost too accessible. That is, there's no penalty for withdrawing (except that you can't re-contribute that amount until the following calendar year). This can lead to behaviour that doesn't align with an investor's overall objectives.
- It has the words “Savings Account" in its name. This has led to most TFSA-holders I know simply putting their money in a Tax-Free savings account. I think because the account name (TFSA) also has a product name (savings account) embedded in it, it's led to confusion. Don't forget that you're not limited to putting your money in a savings account. You could also invest in mutual funds, stocks, etc. The important thing is that whatever you invest in should align with your goal — i.e., what you're putting away money for.
- The ever-changing contribution limits. First an even $5,000, then $5,500, then up to $10,000 for one year, then back to $5,500, and seemingly able to change with any new Federal Government that comes into power. I'd love to see this standardized in some way and set in stone. Most people I know tend to have a hard time keeping track of their contribution room in the first place, and this certainly hasn't helped.
The good news is you can check your TFSA contribution limit by using the My Account feature on the CRA website. (And because of the handy sign-in partner feature, you can use your online banking login!)
If you'd like to submit a question about investing for Joe to answer, you can email it to:askanadvisor@tangerine.ca
This article is intended to provide general information only about TFSAs. If you need further information about your specific circumstances you should speak to an investment advisor.
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