Let’s talk investments. Whether you have a Tax-Free Savings Account (TFSA) or have only heard about it in passing, you probably have some questions around how it works.

Here is a guide with information and tips about TFSAs, so you can make the most of this account. 

What's a TFSA?

A Tax-Free Savings Account (TFSA) is a registered account in which the income you earn is completely tax-free. You don’t even pay tax when you withdraw funds.

How is it different from an RRSP?

The Tax-Free Savings Account is not the same as an RRSP. They do have similar benefits that they are both tax sheltered savings accounts. However, when you do a withdrawal from a Tax-Free Savings Account – it doesn’t go to your taxable income. You also wouldn’t lose your contribution room for following years. You would lose it in the year you do the withdrawal but January 1st the following year, you would get it back; whereas in the RRSP, if you do the withdrawal, you lose that room forever.

How do you invest inside an RRSP or a TFSA?

Within a TFSA and an RRSP, think of it as an umbrella and within the account you can have multiple investments – savings, GICs, mutual funds. It’s all dependent on when you want to use the money, how long you are saving it for and what your risk tolerance is.

Is the TFSA good for people who are just starting out saving their money?

If you are starting out saving, I definitely recommend the Tax-Free Savings Account. It’s great if you don’t have a high taxable income. It’s also great if you change your mind and want to do a withdrawal – you wouldn’t be penalized for that. If you have a high credit card bill that you want to pay back or you want to go on that vacation you just thought of – the TFSA is a great flexible savings account to start off with.

Any downsides to a TFSA?

There are no downsides to a TFSA, if you do any withdrawals, it’s not added to your taxable income and you don’t lose that contribution room. You would get it back in the following year. TFSAs are a good flexible account that it is good for the short-term – so if you have a savings goal of buying a home or saving for a vacation or making a large purchase like a car, but it’s also good for retirement.

Why is a TFSA good for saving for retirement?

An RRSP and a TFSA should really be used in conjunction, together for retirement. A lot of people think of the TFSA as more of a short-term savings but really it’s great for a flexible long-term savings plan.

I’m saving for a trip – do I use a RRSP or a TFSA?

If you have a short-term savings goal, such as a vacation – the Tax-Free Savings Account is definitely the best one to choose. The RRSP is more so for retirement, while the TFSA, when you do withdrawals, you don’t pay any tax on that as well you are not penalized for losing your contribution room, you would get it back for following years.

Make sure to check your contribution room on your TFSA. You can contribute up to $6,000 each year as well as any unused contribution amount you have built up over the years.

Have more questions? Check out our TFSA FAQs to learn more about this investment vehicle and what might work for you and your financial goals? 

Ready to get your investments on track for your future? Book an appointment with a Scotia advisor