TFSA (Tax Free Savings Accounts) Basics

Since everyone is likely busy finding money to fill their RRSP’s (the deadline is March 1, 2010 to claim for the 2009 tax year by the way), people probably aren’t focusing on the TFSA’s right now. If you are a 20something and are in school and aren’t making that much money (aka you’re not getting taxed to the nines), you should think about contributing to a TFSA instead.

The TFSA’s were introduced in the since January 1, 2009 and is basically the greatest thing since sliced bread (or RRSP’s which were introduced almost half a century ago- before we were even born, shucks!)

Like RRSP’s, TFSA’s are not an investment per se, think of it like a glass jar.  It’s a container where you put your investments.  Anything that you EARN from putting stuff in this container is withdrawn tax free.

The TFSA is basically the inverse of the RRSP (DANG, Jim Flaherty- you’re not just a pretty face after all!)

• In the TFSA you invest with your after-tax hard-earned bloodsweat money, and money that is withdrawn from it is NOT taxed.
• In the RRSP, you invest with pre-tax dollars (yes, the tax refund is supposed to reflect this) and money that is withdrawn is taxed– the caveat is that most people who retire are at a lower tax bracket so they will pay less tax on the money withdrawn.

You can hold many things in the TFSA (except USD holdings- only Questrade TFTA’s allow this) and it’s the same for an RRSP.

TFSA Rules:

1. You have to be over 18
2. Everyone gets $5000 a year max to contribute
3. Any unused space in your $5000 can be carried forward to next  years (e.g. you only contributed $2000 in 2009, you can contribute $7000 in 2010)
4. TFSA’s don’t expire (so you can be 98 and still have a TFSA- whereas you HAVE to start withdrawing RRSPs at 71)
5. TFSA’s can hold anything that RRSP’s can hold (For some reason, I have the song “I Can Do Anything You Can Do Better” in my head)

What should you put in your TFSA?

90% of people who start up a TFSA end up stashing their cash in a fixed income high interest savings account that earns 3% (max…) ING Direct is offering this right now, but doesn’t guarantee how long the 3% will last.  Let me give you a hint…Not long.  But at least with the orange key, you get the 3% for an undefined amount of time, AND $25. One other bonus is that ING Direct won’t charge you fees.

That’s good if you want to use it as an emergency cash savings “jar”. But it’s not recommended. After one year at 3% you’ll only get $150 (x your marginal rate of 40%….which is… wait for it……. $60 saved in taxes). So you should definitely let your friend, compound interest take over.

If you’re looking for more growth, then the self directed TFSA is probably the way to go.

You can hold mutual funds, ETF’s, bonds, stocks.. you name it in your TFSA investment account.

Some TFSA Investment Account brokerages/ banks:

• Questrade No fees; check out my post on Tax Free Trading Accounts here
• Scotia itrade No fees.
• HSBC
• CIBC
• BMO
• TD Canada Trust
• RBC

Just a word of caution- some of the bigger banks have fees associated with the registered TFSA account (just like how I have to pay BMO Investorline $105 a year for having an RRSP account open with them- which they neglected to tell me about when I signed on, but that’s another story).

OR you could open up a TD E-Series mutual fund account (low MER’s yeeehaw AND no fees) and put in a small amount each month (e.g. $400) for dollar cost averaging.
I have TD E-trade RRSP account and love it- but it was quite arduous to get it in the first place!
I would recommend going to a TD Branch first and getting a basic mutual fund account (don’t buy any mutual funds on it though!), then convert it to the E-trade account by calling in and then buy your mutual funds there.

Hope that clears up some of the confusion surrounding TFSA’s!
What have you filled with your TFSA?
Any suggestions?

Tags: high interest savings account, investment, RRSP, TFSA

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