Cracking the TFSA Code: How much do you really understand?

It seems like every time we open our internet browser, we see articles about TFSAs. Should you put money in your RRSP or TFSA? RRSP versus TFSA. TFSA traps to avoid. Why TFSA is the best option for saving. How to use your TFSA, etc.

The more we talk to investors, the more we are realizing that a general knowledge of this type of account is very limited.

This is how the Government of Canada describes TFSA:

Saving just got a whole lot easier!

“The Tax-Free Savings Account (TFSA) program began in 2009. It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.  Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible.” 

Pretty clear, right? So why are so many people confused?

Generally, the types of investments that are permitted in a TFSA are the same as those permitted in other plans like Registered Retirement Savings Plans (RRSP). These would include:

  • cash
  • mutual funds
  • securities listed on a designated stock exchange
  • guaranteed investment certificates
  • bonds
  • certain shares of small business corporations

Surveys conducted by various financial institutions found that Canadians do not take full advantage of their Tax-Free Savings Accounts (TFSA). Instead of using their TFSAs to grow their income tax-free, Canadians store their savings at minuscule interest rates. In fact, many TFSAs are not invested in mutual funds, stocks, or even risk-free Government-Insured Certificates (GICs). So what tax are you actually saving?

So don’t get confused by the word “savings”. When it comes to investments, a TFSA is just like your RRSP, LIRA, etc. The only difference is the tax treatment of this account.

When it comes to the question: Should I contribute to my RRSP or TFSA? Don’t look for the answer on the internet. This question is very complex and specific to you and nobody else. You should discuss it with your trusted Financial Advisor.

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