Tax Free Savings Account guide

Interested in the Canadian TSFA (Tax Free Savings account) that everyone's been talking about? There's plenty of information available here to get you started.

So what is a TSFA?
The easiest way to begin is by thinking of the different ways of saving or investing as certain "compartments" or "containers" for tax purposes. For the purposes of this, we're going to use 3 different containers...


This is the default way to save or invest money. For most people, this is simply the money they have in the bank, whether it's a savings or chequing account. However, it can include mutual funds, stocks, bonds, GIC's, and other investments. The way it works as far as tax is concerned, you pay tax on the money you put in (usually it's already been taken off your paycheck though), and you pay tax on the interest it makes.	Many people who have started thinking about retirement have already begun to put money in an RRSP. This is often done through your local bank. The most common ways you see money put into RRSP's are through GIC's, bonds, and mutual funds. It can also include stocks and other investments. The way it works as far as tax is concerned, you do not pay tax on the money you put in (if tax was taken off your paycheck you often get a refund), or on the interest it makes. You only pay tax when you take the money out.	Just about anything that can go into an RRSP can be put into a Tax Free Savings Account instead. The most common ways you're likely to see money put into a TSFA is as a savings account, although GIC's, bonds, and mutual funds are all possibilities as well. It can also include stocks and other investments. The way it works as far as tax is concerned, you pay tax on the money you put in (like the REGULAR container in the previous image). The difference is, you do not pay tax on the interest it makes.

This is the default way to save or invest money. For most people, this is simply the money they have in the bank, whether it's a savings or chequing account. However, it can include mutual funds, stocks, bonds, GIC's, and other investments.

The way it works as far as tax is concerned, you pay tax on the money you put in (usually it's already been taken off your paycheck though), and you pay tax on the interest it makes.

Many people who have started thinking about retirement have already begun to put money in an RRSP. This is often done through your local bank. The most common ways you see money put into RRSP's are through GIC's, bonds, and mutual funds. It can also include stocks and other investments.

The way it works as far as tax is concerned, you do not pay tax on the money you put in (if tax was taken off your paycheck you often get a refund), or on the interest it makes. You only pay tax when you take the money out.

Just about anything that can go into an RRSP can be put into a Tax Free Savings Account instead. The most common ways you're likely to see money put into a TSFA is as a savings account, although GIC's, bonds, and mutual funds are all possibilities as well. It can also include stocks and other investments.

The way it works as far as tax is concerned, you pay tax on the money you put in (like the REGULAR container in the previous image). The difference is, you do not pay tax on the interest it makes.

We've basically already described what a Tax Free Savings Account is. It's just like a regular savings account or investment, except that you do not pay tax on the interest it makes. This probably won't make a big difference to those who have $100 in a savings account that only makes $2-3 interest every year, since the tax paid on that $2-3 interest isn't going to be a lot of money. However, for those who have thousands of dollars in savings or investments, the interest is usually a lot larger, and putting it in a TSFA can protect you from having to pay tax on that interest.

There are however, limitations. You can only put up to $5000/year into a TSFA (amount will increase in future years, indexed to inflation). There are also limitations to the types of investments that can be placed in a TSFA - similar to the investments that can be placed in an RRSP. More info is available on the Government of Canada's TSFA website.

Who should use a TSFA?

Anyone with savings/investments that aren't in an RRSP.
Anyone planning to save money or invest for short-term goals (furniture, car, school, renovations).
Anyone planning to save money or invest for the long-term - anything from an emergency fund to simple long-term savings for retirement.
Anyone saving/investing for retirement who did not make enough money to make an RRSP worthwhile (this allows you to keep your RRSP contribution room unused)
Anyone saving/investing for retirement who has already maxed out their RRSP contribution room, or wants to save it for future years.

Who should NOT use a TSFA?

Basically, those who should use an RRSP instead and have the contribution room to do so. If you're making a lot of money (and are being taxed on it) and plan to make less when you retire, this probably includes you.

Where can I get a TSFA?

Many banks are currently promoting the Tax Free Savings Account. Ask your bank to see if they offer it.
Many investment firms are offering investments held within a TSFA (Investor's Group, etc). If you're already investing, ask your current investment agency.
Many mutual-funds providers are offering mutual funds held within a TSFA (TD Waterhouse, etc). If you're already investing, ask your current investment agency.

Where can I get more info?

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