A Tax-Free Savings Account or (TFSA)
is a type of savings account that is registered with the federal government. You can save and invest toward
any type of goal, and watch those savings grow tax-free throughout your lifetime. Residents with a Canadian Social Insurance Number (SIN) start accumulating TFSA contribution room when they turn 18 whether or not they open an account at that time. You can open a TFSA at many financial institutions like banks, credit unions, investment firms, or online investing platforms. You can also open more than one TFSA. For example, you might have one for short term goals like buying a home and another for long term goals like retirement. Just be aware that your TFSA Contribution Limit, is the total for all of your accounts combined. We’ll talk more about
contribution limits and rules in Part 2. But first, let’s talk about some of the big differences between a TFSA and an RRSP. Unlike an RRSP, you don’t need earned income to contribute to a TFSA, and there is no maximum age for making contributions. However, contributions to a TFSA are not tax-deductible – so you won’t get a tax refund when you put money in. Instead, your withdrawals are tax free. Additionally, any money that you
make on investments inside of your TFSA including interest, dividends and
capital gains remain tax free. [ Alert sound ] You heard that right. Don’t let the name Tax Free Savings Account confuse you. Just like an RRSP, a TFSA is like a bucket that can hold a variety of investment products like stocks, bonds, mutual funds, exchange traded funds, and guaranteed investment certificates (GICs). Once you put money into a TFSA, you can buy and sell investments or change the investments you own. And, because the holdings in your TFSA and the returns you make on those investments will not be considered taxable income when you withdraw them, you can take full advantage of the magic of compounding. Compounding is when the money you earn on your investments gets reinvested to make even more money. Let’s say,
you invest $1,000 in your TFSA and earn a 5% return. In the first year,
you earn $50 on your investment, for a total of $1,050. But in the second year,
you earn $52.50 since the $50 you made in the first year
is now making money too. With your investment now totaling $1,102.50 in the third year you’d make over $55. This cycle allows your TFSA investments to grow exponentially over time. Fast forward 30 years, and your
initial $1,000 investment is worth $4,322, with $3,322 in tax-free growth. Exactly how much money you make in your TFSA depends on the overall
performance of your investments minus any associated fees. Learn more at GetSmarterAboutMoney.ca Brought to you by:
the Ontario Securities Commission (OSC), Investor Office