How TFSAs can be a powerful savings tool

A TFSA is like a basket of assets. You can store cash in it, but you can also use it for qualified investments like mutual funds, Guaranteed Investment Contracts (GICs), stocks and bonds. TFSAs are often self-directed, meaning that you make the investments yourself.

A TFSA might sound like a savings account, but the “S” in the acronym doesn't mean that your money is automatically protected. Some investment types in a TFSA, like mutual funds and stocks, can go down or up. On the other hand, you're guaranteed to get your principal investment in a GIC back. So, you can balance the mix of investments to suit your own risk profile.

One advantageous thing about a TFSA is its tax benefits. You've already paid tax on the money that you contribute to a TFSA, and Canada Revenue doesn't tax the interest or capital gains that you make on investments in the account. Everything that you earn in your TFSA is yours to keep, even after withdrawal. You can make that withdrawal at any time with no penalties. You will, however, be taxed if you exceed your annual contribution limit — more on that in a few.

If you're an adult living in Canada with a valid social insurance number, then you can open a TFSA account like Simplii's. A TFSA at Simplii offers a competitive interest rate with no minimum-balance requirement.

TFSAs are versatile, so they can support a wide range of different goals. They're useful whether you're just coming into the workforce and want to save for miscellaneous life expenses, or if you're nearing retirement and want to squirrel away a little extra. You can use a TFSA to put away money for short-term goals like a dream holiday, or longer-term plans like buying a home.

Registered Retirement Savings Plans (RRSPs) support long-term investments that grow your money for retirement, and they're structured differently. Unlike a TFSA, the money you pay into an RRSP reduces your taxable income. That's especially useful for those earning more who can benefit from reducing their income to move into a lower tax bracket.

The downside of an RRSP is that you add any money that you withdraw to your taxable income for that year, except in certain circumstances like going back to school or putting a down payment on your first home. That could bump up your taxes considerably, perhaps even putting you into a different tax bracket. If you need to access funds quickly in the event of an emergency, that extra tax can be a particularly painful financial hit.

A TFSA is a solid choice if you suspect you might one day need fast access to funds.

There are some constraints on TFSAs. The most important is the contribution limit. You're only allowed to deposit cash up until a set threshold. The 2023 limit is $6,500, and it increases based on inflation. Pay more than the limit, and you'll incur a penalty of up to 1% of the surplus for each month it sits in your account.

There are ways to contribute extra, however. You can give money to your spouse or common-law partner to put in their TFSA, and that money won't affect your own contribution limit.

On the upside, the contribution limit rolls over, meaning that you can add unused contributions from previous years to this year's limit. If you were 18 years old or older in 2009 and have never paid into a TFSA, you can contribute up to $88,000 in 2023.

The other restriction is that a TFSA isn't like a straightforward savings account. If you take money out, you can't put it back in until the following year. On the other hand, that withdrawal amount is added to your contribution limit for the next year, making a TFSA a flexible way to both save and fall back on funds in an emergency.

You bet. It's a good place to put any extra income from your pension that you don't need without paying interest on it. It also offers a tax shelter for interest on non-registered GICs. Finally, contributing to a TFSA won't affect government benefits like Old Age Security or the Guaranteed Income Supplement.

It's simple — in fact, Simplii offers its own TFSA. You can start the process of setting up an account right here.