Six benefits of the TFSA you should know

It’s over a decade since TFSAs were introduced, but some people still don’t fully understand them. Here are six benefits of TFSAs that you should know about.

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When the tax-free savings account (TFSA) launched in 2009, it was thought of by many people as a secondary savings account where people would mostly store short-term cash. Few people realized the greater benefits of the TFSA. It’s sure grown up since then.

As the years have gone by, the TFSA’s annual contribution limit has grown. It started out at $5,000, then rose to $5,500 in 2013 and, since 2019, it’s been $6,000. There was a one-off contribution limit of $10,000 in 2015, but it went back to $5,500 the following year. The current cumulative contribution room for Canadian residents who were at least 18 years old in 2009 and who have never contributed to a TFSA is $81,500. That’s a lot of room to work with.

Even after more than a decade, there are still some aspects of the TFSA that some people aren’t aware of, so here are six benefits of TFSAs that you should know about. 

1. TFSAs are for much more than just cash

When the TFSA first came out, most people saw it as just another bank savings account, because it had “savings account” in the title. So, they were a little confused and thought it was limited to just cash savings. Over the years, however, people realized that virtually any investment that can be held inside an RRSP can be held inside a TFSA. That includes stocks, bonds, mutual funds, more long-term investments: you can even put long-term retirement assets into it.

2. Unlike RRSPs, TFSAs allow for truly tax-free growth

The single biggest benefit of a TFSA is that growth of all assets within it are tax-free: this includes interest, dividends and capital gains. You won’t pay a penny in income tax even when you withdraw from your account or sell the assets inside the TFSA.

While investments inside an RRSP are also not subject to tax while they grow within the plan, as soon as you withdraw from an RRSP (or a RRIF) it’s treated as income and taxed according to your tax bracket.

3. TFSAs are totally flexible

You can withdraw money from your TFSA at any time, for any reason, without paying income tax. Also, the amount you withdraw is added to your contribution room for the following year.  

Any withdrawals from an RRSP are subject to income tax. And you will lose the amount you withdraw from your overall contribution room: it’s not added back the following year.

4. Cumulative contribution room has increased to $81,500

When contribution room was only $5,000, the advantages of a TFSA weren’t that obvious: you weren’t saving a lot in tax. Now that you may have up to $81,500 of contribution room, the tax savings on investment earnings start to make a real difference, and the benefits of a TFSA are becoming a lot more appealing.

Also, because it’s a viable option for mutual funds and long-term investing, you can make it a part of your retirement plan. And with a $6,000 annual contribution limit, which will continue to increase with inflation, it’s becoming an integral part of many Canadians’ retirement plans.

5. TFSAs are ideal for high-net-worth individuals 

Most high net-worth individuals are probably aware of the tax benefits of a TFSA and may maximize contributions to their RRSP first and then to their TFSA. But any high-net-worth individuals who aren’t taking full advantage of a TFSA really should consider it.

6. TFSAs provide another retirement planning tool

One of the key benefits of the TFSA is that it provides another retirement savings option, where money can grow tax-free for people who max out their RRSP. It generally makes sense to contribute the maximum each year: when withdrawing the money in retirement, you won’t have to pay any income tax. It can supplement other sources of retirement income and help you to reduce your tax obligations in retirement. The TFSA is a powerful tool to save for retirement quickly and tax-efficiently. 

How to take full advantage of your TFSA

Your IG Consultant can help you to make the most out of your TFSA contribution room – contact them today to arrange a time for you both to discuss how to use one to reach your savings goals faster.

Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing.  Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice.