The Tax-Free Savings account (TFSA): make it make cents (or in our case, dollars)
A misleading name has tricked many Canadians into treating the TFSA like a savings account instead of an investment account.
A funny thing about the TFSA is the name. It sounds like a regular savings account, but it is not. It should honestly be called the “Tax Free INVESTMENT account”. Because yes, you can save cash in it, but the magic happens only when you invest inside it.
The Financial Post recently showed how confusing this is for many Canadians. About 60% of younger adults have a TFSA, but 41% are not investing the money sitting in that account. It just sits there earning nothing, and then people wonder why it is not growing.
I cannot tell you how many friends have told me they opened one, parked money inside it, and checked their balance six months later annoyed that nothing happened. The missing step is simple: a TFSA is a shell. Once money is inside the shell, you still need to choose actual investment products, like ETFs, stocks, mutual funds, or even GICs to make your money grow (I will be sharing a full post on different investment products soon).
And the beauty of it, is that the growth on that money is tax-free.
A TFSA is like a Garden Box:
Putting Soil in it is not enough.
Nothing grows until you plant something.
No tax on gains, no tax on interest, no tax on dividends (except if you receive dividends in USD currency). You keep your money rather than sending part of it to the politicians on Parliament Hill.
Here is a simple walk through of how a TFSA works:
The TFSA launched in 2009
You earn new contribution room every single year once you turn 18 (or arrived in Canada) or once you become a Canadian resident.
Contribution room is simply the amount you are allowed to put into the account. If you do not use it one year, it carries forward.
Right now the annual limit is $7,000.00 but this number can change depending on federal updates. Anyone who has been eligible since 2009 will have $109,000.00 of total room in two thousand twenty six.
You can withdraw money anytime without being penalized (as opposed to withdrawing from the RRSP)
If you withdraw money you get your contribution room back on January first of the next year. (tip: a lot of seasoned investors withdraw money they need on December 31st to regain that contribution room the next year)
If your investments lose value it does not impact your contribution room at all.
The CRA does not love it when people use a TFSA for full time day trading: if used as an income stream you can be taxed on it. This is only for the most extreme cases but this is not something the average investor needs to worry about.
All contributions come from after tax income which means every dollar you earn inside the account stays yours.
What can a TFSA help you build?
Unlike an RRSP or FHSA, the money you have in your TFSA can be used for anything.
Anything that has a medium or long runway. A retirement nest egg. Plan A down payment. A future travel fund. A safety cushion for life’s surprises. If you can leave the money alone for five years or more, this account shines.
How do you open one?
Any well known Canadian bank or financial institution can help you open a TFSA, but Hot Money Mom is a proponent of online platforms such as Questrade and Wealthsimple because they are simple to use and have next to no fees (if any). If you want to welcome a 25$ bonus into your first TFSA, you can open a Wealthsimple account with this link.
For more in-depth information, please visit the Government of Canada’s guide on the TFSA.
Also, please visit my Ressources page for more information on investments.
