If you’re not considering opening a TFSA account, you need to think again!
Opening a tax-free savings account in Canada can help you get the most out of your money while preparing for your future.
TFSA was designed to help Canadians save more and protect the savings over a long period.
TFSA is not only easy to set up, but it is also flexible and offers many benefits that can make a real difference to your retirement or other future goals.
Unfortunately, according to BMO TFSA Annual Study, about one-quarter of Canadians don’t know what should be included in TFSA, making them “underutilize” it.
This means a considerable number of Canadians are missing out on the ample opportunities TFSA has to offer.
To help you tap into TFSA’s numerous opportunities, I write this step-by-step guide explaining all you need to know about TFSA.
At the end of this post, you should understand why the TFSA is the best vehicle for building financial security.
Let’s get right into it!
What is Tax-Free Savings Account?
A tax-free savings account (TFSA) is a Canadian special account that allows you to save and invest your money without any tax deduction.
As the name suggests, tax-free savings accounts in Canada don’t levy tax on investment income, such as dividends and capital gains, even on withdrawals.
Also, administrative or any fees related to TFSAs and any interest or debt are not tax-deductible.
The TFSA is a multi-purpose investment portfolio. You can use the money in your TFSA account the way you want, unlike regular accounts that are devoted to particular purposes.
Even though it is called a “savings account,” your TFSA is more than just a saving tool; it is a valuable investment tool as well.
With a TFSA account, you have multiple options of investment, including mutual funds, GICs, stocks, exchange-traded funds (ETFs), and bonds.
Since its inception in 2009, the TFSA program has been growing and getting more popular in Canada.
Investing in the TFSA is the perfect way to leverage its tax-advantaged potential since it gives a better return than regular savings accounts.
Under this program, every Canadian aged 18 and above who has a valid Social Insurance Number (SIN) can use a TFSA throughout their lifetime.
Whether you’re saving for your children’s education, for retirement or to help with home renovations, TFSA, is a smart choice.
Why the TFSA is the Best Vehicle for Building Financial Security?
Here are the major reasons why the TFSA is the best vehicle for building financial security:
Save for a rainy day
If you’re not used to saving some money, a TFSA will encourage you to do so. A Tax-Free Savings Account (TFSA) is one of the best ways to save for a “rainy day.”
A TFSA is an all-purpose savings account that allows you to invest for a variety of purposes in one account.
Your savings grow tax-free over time, allowing you to meet your targets faster, and you can withdraw them whenever you need them.
No income requirements
Enjoy flexibility on how much you save by opening a TFSA that grows tax-free throughout your lifespan.
You may not need to meet any minimum income standards to open a TFSA. This means that almost everyone can start investing and reaping the benefits of a TFSA.
Withdraw money with ease
You can easily withdraw your money from your TFSA account if you need it for both large and minor expenses.
This ensures you’ll have no trouble meeting both your long- and short-term financial objectives. It’s worth noting that withdrawals aren’t taxable, which is a plus.
Reduce taxes on investments
Make investments inside your TFSA and make more money in the long run tax-free.
Unless they are held in a TFSA, investments are normally charged high on taxes. Foreign dividends and income interest, for instance, are often charged at the highest rates.
Maximize your RRSP
You can withdraw money from your TFSA tax-free after you’ve retired. For an RRSP, you must pay taxes on your withdrawals. When you’re retired, combining TFSA with RRSP can be beneficial.
You may contribute to a TFSA for a partner or any member of your family. Unlike an RRSP, spousal attribution conditions do not apply in TFSA.
What are the drawbacks of a TFSA?
- TFSA has tough punishment for over-contributions. Even if you unintentionally surpass your annual contribution limit, you will be charged 1% interest monthly.
- Because your TFSA contributions are not tax-deductible, you won’t earn any tax benefit such as a tax refund on the contribution.
- Your unused contribution room is mixed with the withdrawal you make from your TFSA. You will normally have to wait for a new year in order to re-contribute a withdrawal.
- There is no provision for a TFSA spousal scheme, but you can give your spouse or partner money to contribute to their TFSA account without getting the benefit earnings from that money being credited directly to you.
- Another big limitation is that TFSAs aren’t safe from creditors. If you’re embroiled in bankruptcy or lawsuit, your TFSA will be withheld by your creditors. If you have a retirement savings TFSA, they can confiscate it all.
How is a TFSA Different from a Regular Savings Account?
As noted earlier, one-quarter of Canadians don’t know the full potential of TFSA, which makes them underutilized it.
This is mostly due to not understanding the differences between a TFSA account and a regular savings account. While the two share some similarities, but they differ in many ways.
The interest you earn in a regular savings account is taxed. While the interest you earned in a TFSA is not taxed.
Also, a TFSA does not have to be solely a savings account, unlike a regular savings account. TFSA allows you to invest in stocks, bonds, GICs, ETFs, mutual funds and other investment instruments.
There are no taxes on any gains with a TFSA. This is not applicable to a regular savings account. In most cases, you only have one choice for a regular savings account: a high-interest savings account.
Unlike a regular savings account, you can withdraw your money any time out of TFSA, even though you won’t be able to deposit it again till another year.
How is a TFSA Different from an RRSP?
A Registered Retirement Savings Plan (RRSP) is a form of savings for your financial security after retirement.
Your contribution limit on RRSP is determined by your income, and while your donations are tax-deductible, the money you earn as income is also taxable.
A TFSA, on the other hand, is aimed at assisting you to save more money for a variety of purposes, not just for retirement.
Your TFSA contributions are not determined by your income, and they are not tax-deductible.
You can take your money out of your TFSA whenever you choose, and the withdrawals are tax-free.
When you make a withdrawal from TFSA, you don’t miss any donation room; you can put the money back into the TFSA the next year or any year after that.
Unlike RRSP, if you want to withdraw your money on TFSA, you can do so without incurring tax penalties.
Another difference is that, unlike an RRSP, you can continue to contribute to your TFSA account long as you want, without stopping at a certain age.
What are TFSA Rules?
A Tax-Free Savings Account (TFSA) is a way to save money for short or long-term goals. The account grows tax-free and can be used at any time with no tax implications.
However, to maximize the benefits of a TFSA account, you need to keep up with the rules.
Here are three major TFSA rules you need to know:
Your “contribution room” is the total amount of money you are eligible to contribute to your TFSA.
Canadians are given an additional TFSA contribution room every year, in addition to their current contribution room.
Any contribution room that is unused from one year will be rolled over to the next.
You’re not allowed to over-contribute your TFSA. Over-contribution is described as a contribution to a TFSA that exceeds your maximum contribution limit.
If you over-contribute, the Canada Revenue Agency (CRA) will charge you a penalty of 1% monthly, not until you withdraw the excess contribution.
TFSA Contribution Room Per Year
You can take money out of your TFSA whenever you want. However, in the case of investment, there may be specific product limitations, such as GIC maturity dates.
You can re-contribute the money you withdraw back into your TFSA the next year without affecting your total contribution room.
If you want to replace the money you take out of your TFSA, you’ll have to wait for the next year to be entitled to that contribution room.
If you wish, within the same year, to replace or re-contribute the money you pulled out, you can only do so if you have sufficient TFSA contribution room.
Any investment losses in a TFSA are not regarded as withdrawals and do not count against your contribution room.
Simply because it’s called a TFSA doesn’t mean investments are entirely tax-free. There are some exceptions to the rules, and taxation does play a role in some situations.
For example, tax charges for dividend-paying foreign investments. Foreign investment dividends apply to non-resident withholding tax (NRT).
This, like every other tax, reduces your take-home earnings. That isn’t to say you shouldn’t consider foreign dividend-paying investments.
It’s critical to have a well-diversified portfolio, which may include foreign dividend-paying stocks, especially in sectors where the Canadian Stock Exchange could be underrepresented.
What are the Best Tax-Free Savings Investments?
While the term “tax-free savings account” implies saving your money, with a tax-free savings account, you aren’t limited to making your money work for you.
In fact, the TFSA is a tax-advantaged savings tool more than a savings account. The money you put into your TFSA can be invested in a lot of different ways.
The amount of risk you’re able to take on, as well as the time span of your investment targets, will influence how you invest the money in your TFSA.
The following are the best TFSA investments you need to consider:
- Savings account (Cash)
- Guaranteed Income Certificates (GICs)
- Exchange-traded funds (ETFs)
- Mutual funds
- Corporate and government bonds
These investment categories have benefits that will appeal to some investors and drawbacks that will discourage other investors from deciding how to develop their TFSAs.
Let us now take a look at each of the following types of TFSA investments mentioned above.
A savings account is one of the simplest ways to get started with TFSA.
This works similarly to a regular savings account because you will deposit money into it and it receives a guaranteed interest.
TFSA savings account has the additional advantage of helping you to enjoy tax-free interest income, which would normally be automatically taxable on a non-registered account.
If you want to save for the short term or need quick cash access in an emergency, this type of TFSA investment is ideal.
Guaranteed Income Certificates (GICs) provide you with a higher guaranteed rate of return than a regular high-interest savings account.
Your money, however, will be locked in for a fixed period of time, making it less available.
But you will get both the principal (the initial sum you invested) as well as the interest that you earned at the end of the term.
The duration of a GIC will range from 30 days to ten years. The most frequent duration of GICs is one and five years.
GIC is a great form of TFSA investment because you’re guaranteed to get your money back and interest by the end of the term.
Since exchange-traded funds (ETFs) are simplified and a low-cost way to invest in a range of investments, I decided to add them to my list of best TFSA investments you should consider.
When compared to a stock or bond, ETFs are like cocktails. By investing in ETFs, you’re putting your capital into a group of companies that you’ve chosen.
Since they hold commodities, stocks, and bonds, ETFs are purchased and sold on exchanges just like stocks.
The majority of ETFs are “passively regulated,” which means that the underlying assets are bought and sold depending on general market, industry and economic trends.
You may choose “actively managed” ETFs, in which portfolio managers purchase and sell shares in an attempt to outperform the economy.
That comes with a price, as they aren’t always good, which may cost you money. ETFs are often compared to mutual funds because of their reduced fees.
That’s a risk, though, as they are not always successful, which may lead to losses.
Mutual funds have been in existence long before ETFs, but they operate in a similar manner, providing a portfolio of various investments. The distinction is in the manner in which they are purchased.
Based on the stock market, ETF prices can change at any point, whereas mutual funds have a set price at the end of the trading day.
Mutual funds for your TFSA can be purchased from a broker, but they are also available from banks, Robo-advisors, credit unions and other sources.
It usually entails creating an online account, determining your risk tolerance level, and deciding how much money you want to invest.
Mutual funds are riskier compared to GICs or bonds as it is actively managed by a fund manager.
Because of their high maintenance, mutual funds are the most costly type of TFSA investments.
With TFSA, you can invest in both corporate and government bonds (municipal, provincial, and federal).
Unlike GICs, bonds pay you in regular installments throughout the term, rather than waiting until the bond matures to pay you in one lump sum.
The risk level of government bonds is low when compared to corporate bonds, but government bonds also have a lower rate of return.
As opposed to stocks, bonds can be relatively stable assets if kept to maturity.
Also, it is not difficult to find a bond with a term to maturity that corresponds to your financial goal’s time frame.
Stocks are one of the riskiest investments you can make with your TFSA. Since they are riskier, they have a far better overall return than, say, a savings account.
Investing in stocks is similar to investing in most assets, except that stocks TFSA investment capital gains aren’t taxed, which ensures you keep the entire profit if your investment doubles in value.
A qualified TFSA shares investment must be listed on a stock exchange, such as the TSX Venture Exchange, Toronto Stock Exchange, Nasdaq or New York Stock Exchange.
The Canadian Department of Finance website contains more than 40 stock exchanges across the world. It’s safe to confirm that the stocks you want to buy are traded on one of these exchanges before you buy them.
If you own foreign dividend-paying stocks, keep in mind that you may pay a withholding tax on the dividends you earn.
This is because certain countries impose a tax on foreign owners on the dividends they paid them. This tax rate varies by region, but it is 15% in the United States for dividend-paying stocks.
How to Choose the Right TFSA Investment?
A TFSA is an investment vehicle that can help you reach your short- and long-term financial goals.
After learning about the best TFSA investment out there, I believe you’re now wondering what’s suitable for you. You’re right to do so.
When it comes to choosing the right TFSA investment, there’s no one-size-fits-all. This implies that what works for one person may not work for another.
So it’s important to evaluate your situation and consider some important factors along with some financial goals.
Here are five important questions that will help make an informed decision when wondering what TFSA investment is right for you:
- Are you saving goals short-term or long-term?
- What is your budget?
- How often do you intend to make withdrawals from your TFSA?
- Can you invest in more than one form of TFSA investments?
- What is your risk tolerance level?
Best Tax-Free Saving Accounts in Canada?
Here are some of the best tax-free savings accounts (TFSAs) in Canada:
EQ Bank TFSA Savings Account
In 2016, Equitable Bank launched EQ Bank to provide online-only savings accounts in addition to GIC experience to Canadians.
Recently, EQ Bank has extended its services by offering TFSA Savings Accounts for those who already have a Savings Plus Account.
With EQ Bank TFSA Savings Account, there are no charges for deposits or withdrawals.
Not only can the investments rise quicker without charges, but the earnings will be tax-free, much like every other TFSA. As a result, this is a very safe and profitable means to save your money.
Although you can only have one TFSA account open at a time with EQ Bank, and you can only have a maximum of $200,000 in your account.
Like other EQ Bank accounts, the EQ Bank TFSA Savings Account is CDIC-insured, which means your money is safe up to $100,000.
Note: Residents of Quebec are not qualified to use EQ Bank.
Oaken Tax-Free Savings Account
Oak Financial also provides Tax-Free Savings accounts through guaranteed investment certificates (GICs).
Oaken TFSA savings account interest rates vary from 1.40% to 2.10%, based on a chosen time frame, and require a minimum deposit of $1000.
Besides its zero charges on GICs, this TFSA savings account also charges zero fees for moving your TFSA to another institution.
An Oaken TFSA savings account is a perfect choice for those who are unwilling to take risks since it guarantees a return rate around or above inflation.
Also, account holders won’t be penalized if another bank suddenly launched a more profitable TFSA that makes it’s preferable to move from Oaken.
Tangerine Tax-Free Savings Account
$50 for transferring to another institution
When you open a Tangerine TFSA savings account, you can earn 2.10% interest and get a $150 bonus if you meet the payroll criteria.
However, this deal is only valid for people who have never had a Tangerine account before.
Tangerine TFSA savings account interest rate reduced to 0.10% once the promotion expires. This is a relatively low-interest rate for a virtual bank.
It is, however, a decent option for those who want to have the majority of their banking items under one roof.
Tangerine is one of Canada’s most advanced virtual banks, providing a comprehensive range of financial services and goods.
Monthly or transaction fees are not charged by Tangerine for its TFSA. But if you wish to move your Tangerine TFSA to another institution, you will be charged $50.
Tangerine has a goal tracking feature that helps you monitor the progress of your savings.
None for a regular TFSA; $1000 for a GIC held in a TFSA
$50 for closing a TFSA within one year of opening, or for transferring a TFSA to another financial institution
Motive Financial is an online-based bank with low operating costs, allowing it to offer its customers high interest rates.
It’s particularly appealing to those who want the flexibility of keeping their cash in a TFSA savings account.
Besides zero withdrawal fees, Motive TFSA also has a 1.75% interest rate, which is among the best in Canada.
1.75% is equal to Motive’s interest rates on GICs held in a TFSA, which range from 1.5% to 2.0% on periods of one to five years.
$50 for transferring to another institution
motusbank, which is Meridian Credit Union’s subsidiary, is an online bank that offers high savings interest rates to its customers, with a competitive TFSA interest rate of 1.5%.
TFSA GICs are also available in motusbank, with 1.25% to 1.65% interest rates. CDIC insures deposits up to $100,000.
With zero banking fees, motusbank does not also have a minimum balance or minimum deposit. However, h it will cost you $50 to transfer your TFSA from motusbank to another institution.
Note: motusbank TFSA account is available in all provinces with the exception of Quebec.
Hubert Financial TFSA
Deposit Guarantee Corporation of Manitoba
Owned by Sunova Credit Union, Hubert Financial TFSA is another online bank you need to consider when looking for the best TFSA savings account.
The Deposit Guarantee Corporation of Manitoba guarantees the interest rate of Hubert Financial TFSA Savings Account, which is 1.00%.
With no minimum balance and monthly fees, your TFSA savings account interest is determined daily and paid out monthly.
BMO TFSA Account
$50 for transferring to another institution
Last but not least TFSA savings account on my list is the BMO TFSA account. Although BMO’s TFSA interest rate is relatively low (0.05%), those who want to do business with a big bank may ignore this.
BMO is your go-to for not just cash investment. It provides TFSAs for both cash deposits and investment holdings.
Like the above TFSA savings accounts, BMO does not also charge a withdrawal fee from its TFSA. However, it does charge $50 for moving your TFSA to another financial institution.
Note: You are not restricted to have just one TFSA with a single financial institution. You are entitled to open several accounts, either through the same issuer or with a separate financial institution, as long as you do not over-contribute.
How I Rated the Best Canadian TFSA Savings Account?
A tax-free savings account is an excellent account for Canadians to take advantage of.
In the past, when people ask me what the best Canadian TFSA savings account is, I usually tell them: “just pick one with a decent interest rate.”
But from my personal experience and what I’ve learnt from others so far, determining the best TFSA savings account is actually beyond decent, looking at a decent rate.
Here are the five key factors I look at to determine which TFSA savings account can help Canadians get the most out of their savings.
Regular Interest Rate
Since the inflation rate in Canada is around 2%, it is important to consider TFSA savings account with an interest rate equal to or above the inflation rate.
Some of the above TFSA savings accounts have a decent interest rate of more than 2%. But since it’s not just about the interest, others were rated based on other factors.
Though TFSAs rarely charge monthly or annual account fees, the financial institution may charge fees for moving a TFSA to another financial institution or inactivity on the account for an extended period of time etc.
Some of the best TFSA savings accounts listed above have no fees for any transactions, while others charge $50 for transferring the TFSA account to another institution.
The minimum deposit amount is an important parameter for each account issuer. For most of the above TFSA savings accounts, there’s no minimum deposit requirement, while few others require a minimum deposit.
However, you can keep putting in as much money as you want as long as the total deposit doesn’t exceed your contribution room for the year.
While it’s rare for a TFSA’s issuer to go bankrupt, it’s best to be safe than sorry. That’s why it’s important to save your money in a financial institution that is covered by the Canada Deposit Insurance Corporation (CDIC) or any provincial deposit insurer.
Most of the above TFSA savings accounts are covered by CDIC with insured deposits of up to $100,000.
Not all financial institutions in Canada are easily accessible. Some only exist in a few provinces with a few branches in major Canadian cities, while others operate entirely online with no physical presence.
Most of the above TFSA savings accounts operate online, while others have widespread branches, making them easy to access by Canadians.
How to Open a Tax-Free Savings Account?
Remember, you must be at least 18 years old and a Canadian citizen with a valid Social Insurance Number (SIN) to be eligible for a TFSA account.
When you’ve decided to open a TFSA account, the first step is to choose which type of TFSA you want: whenever a savings account, a mutual fund TFSA, a stock TFSA, or a GIC TFSA etc.
Once you’ve decided on the type of TFSA that is suitable for your financial situation and goals, you are ready to start the process of opening the account.
Fortunately, despite its obvious complexity, opening a TFSA account is a simple process.
Here are the three major options available to you when it comes to opening a TFSA account:
Don’t just go to the regular bank to open a TFSA account. Opening a TFSA account in a traditional bank will almost certainly earn you a low dividend.
Consider the attractive interest rates provided by the ever-increasingly online banks to earn as much interest as possible and maximize your tax-free gains.
Online banks compete with Canada’s Big Five by offering interest rates that are considerably higher than traditional banks.
The best TFSA savings account we have listed above are some of the best online banks you should consider.
TFSA accounts at online banks operate in the same way as TFSA accounts at traditional banks do, and they’re a great choice if you’re used to banking online.
Through online brokers, you can invest in a number of qualified investments and earn tax-free income for the rest of your life with your tax-free savings account.
You may want to open a TFSA account with Wealthsimple Trade if you are interested in investing. You can buy and sell stocks and ETFs for free with Wealthsimple Trade.
Just a few brokerages in Canada offer free ETF trades and most charge at least $9.99 per trade.
That is ideal for you if you value zero-fee trading with no account minimums, allowing you to begin trading and open a TFSA account with even $1.
Most Canadian discount brokers, such as Questrade, offer TFSA investing accounts.
Though you may risk losing money if the stock price falls (a risk you can’t afford with a personal TFSAs account), you might reap even better returns.
Also, if you’re not an investor but you want to open a TFSA investing account, you can make it real by using a Robo-advisor such as Wealthsimple or Questwealth Portfolios (Questtrade’s Robo-advisor arm).
Robo-advisors are online investment managers that do hard work for you by creating tailored portfolios that complement your investment objectives. They also rebalance your portfolio on a regular basis for you.
Whether you’re starting out or you’ve been saving for years, a TFSA can be effective in helping you reach your savings goals while lowering your taxes.
A TFSA can help you save for children’s education, home renovation, retirement and can be quite advantageous when compared with a traditional savings account.
Canada’s tax-free savings account is a simple, tax-free savings vehicle. Earn investment income tax-free – including interest, dividends, and capital gains – while your money grows.
Contributions are not tax-deductible, and any income earned within the TFSA is tax-free, even when you take money out.
Getting off on the right foot can make all the difference, and when it comes to tax-free savings accounts, that means starting your journey with a basic understanding of the rules.
I hope you now have a better understanding of why the TFSA is the best vehicle for building financial security.
Most importantly, you can now take a step further to invest in a TFSA that suits your financial situation and goals.
All the best!
Frequently Asked Questions on Tax-Free Savings Account (TFSA)
Are TFSAs worth it?
Sure. A TFSA account allows you to save and invest your money without having to pay interest on your earnings as long as you want.
How much money can I contribute to my TFSA?
You’re entitled to contribute as much as you want so long you don’t exceed your contribution limit.
The contribution limit for qualified TFSA beneficiaries in 2021 is $6,000. Your unused contribution room this year will be rolled to the next year’s contribution room.
What happens if I over contribute to a TFSA?
For any month or partial month where the over-contribution is made in the TFSA account, the Canada Revenue Agency (CRA) charges a 1% monthly tax.
The 1% tax will remain in effect until the excess contribution is withdrawn completely, or the whole over-contribution amount is absorbed by extra unused TFSA contribution room in subsequent years.
Please visit the CRA website for more information.
Can I have more than one Tax-Free Savings Account?
At any given time, you can have multiple TFSAs. However, the total amount you contribute to all of them cannot exceed your annual available TFSA contribution room.
As a result, unless you want to test different options by investing some of your annual contributions into a savings account and the rest into stocks TFSA, GICs TFSA or mutual fund TFSA.
What happens to my TFSA if I die?
If you name your spouse or common-law partner as a successor, they will take over your account without it impacting their own TFSA if you die.
Alternatively, you may name a beneficiary or beneficiaries to obtain your TFSA funds when you pass on.
With the exception of Quebec, all provinces and territories provide the beneficiary/successor holder option.
Note: Quebec residents may render designations in their wills.
Can I open a joint TFSA?
No, only personal accounts are permitted. However, you can open a TFSA with the name of your spouse and contribute to it.
Have more questions or any contributions? Feel free to drop them in the comment section.