A recent poll found that more than one in three Canadians don’t really understand how TFSA works, so if you are clear on how it works, take comfort in knowing you are not alone. In this section, you will be provided with all you need to know about TFSA – how it works and how you can take advantage of this little financial gem.

What is TFSA?

A Tax-Free Savings Account (TFSA) is a registered investment or savings account that allows any individual 18 years or older to set money aside for eligible investments and watch them grow tax-free throughout their lifetime. It was introduced by the government of Canada in 2009 and has become the most important savings instrument available to Canadians since RRSP was introduced in 1957.

On a general note, you should consider prioritizing TFSA if;

  • Your income is under $50,000
  • You want easy, hitch-free access to your money
  • You don’t want a limit on how long you can operate the
    account

Which is better?

Both TFSA and RRSP provide productive ways to grow financially; they are both effective investment vehicles. Determining which one is best for you at a particular point in time depends on a number of factors

  • 1. Tax rate

If you are in a higher tax bracket when you deposit funds, than when you take it out, then it makes a lot of sense to use an RRSP. Taking the funds out when you are in a lower tax bracket means you will pay a lower amount in taxes. Conversely, if you withdraw the funds when you are in a higher tax bracket than you are currently in, then TFSA is the better option. If tax rates remain the same from when the money was contributed and when it was taken out, then both options will yield similar outcomes.

  • 2. Objective

Objective is another factor that you need to consider when choosing between these two. RRSP is best suited for long-term retirement goals, while TFSA is a better option if you plan on taking money out before your retirement. TFSAs are designed to be easily accessible before retirement. In addition, TFSA allows you to make withdrawals without paying tax on every withdrawal. Also, unlike RRSP, TFSA allows you to keep contributing for as long as you live. There is no age limit – you are not required to close your TFSA at a particular age.