Tax Free Savings Accounts (TFSA) – Fact or Fiction!

Do you know what is FACT and what is FICTION about a Tax-Free Savings Account?

It is true that many Canadians have opened TFSA accounts. However, a substantial percentage of these people are confused about how TFSA’s work ~ where to open them, what types of investments can be contained in them, and the limits.

Fact or Fiction:

  • A TFSA can only be opened at a bank – FICTION. You often hear banks or credit unions advertise ‘best TFSA rate out there”, This is the main reason why people think that a TFSA is the investment and it can only be held at a bank.
  • The FACT is you can open a TFSA with banks, investment firms and credit unions.
  • Only Investments that earn interest such as a Daily interest account or GIC can be in a TFSA – FICTION
  • The FACT is TFSA can contain cash, GIC, Government or Corporate Bonds, Mutual Funds or Stocks. The best way to decide on which investment vehicle to put in your TFSA is to fist, determine the future purpose of the funds and secondly, how will your TFSA will fit into your financial plan.
  • You lose your contribution room when you withdraw from your TFSA – FICTION
  • The FACT is when you withdraw from a TFSA you can deposit that amount bank in the next year on top of the regular contribution.
  • A TFSA should be used for an emergency fund only – FICTION
  • The FACT is that although it may be beneficial to use a small portion of the funds in a TFSA for an emergency fund it is not the most efficient use of a TFSA as a tax strategy. The rules of a TFSA mean that there is a lot of potential tax savings down the road.
  • You have to have earned income to open a TFSA – FICTION
  • The FACT is that anyone over the age of 18 with a valid Social Insurance Number can open a TFSA

How did all this FICTION come to play? Was it misinformation in the media channels about how they worked? Or lack of clear communication from Canadian Government and Financial Institutions in the beginning? Or is it the term ‘Savings account’ where people get the wrong idea of what a TFSA account is all about and why so many Canadians are using their TFSA’s ineffectively?

People are often confused about the annual contribution limits and carry forward rules.  The 2016 TFSA contribution limit is $5,500 and as of 2016 the lifetime cumulative limit for TFSA contribution was $46,500 if you never contributed to a TFSA since they were created in 2009.

Should I be contributing to a TFSA? What is the right investment for me?

To learn more about TFSA’s including whether or not it is the right investment vehicle for you, or what investment is the right one to hold inside your TFSA for you check out our website Durham Financial