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The tax free savings account is a way for Canadians to accumulate wealth without a tax penalty

Tax Free Savings Account - Canada - TFSA

Tax Free Savings Account - TFSA

According to the Government of Canada, the TFSA or tax free savings account  is a "flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs."  Digesting that sentence and what it means is that in a TFSA you can hold qualified investments, things like gic's mutual funds, stocks and a few other things that can earn you money and there is no tax consequence on the earnings and also no tax consequence if you pull out the money to use it. On top of that if you take money out then later you can put the same back in. Sort of like a rubber band effect.

Now what they don't tell you is that you could also potentially lose money. How? Well gic's and straight savings are probably not keeping up with inflation especially since we have had such low interest rates in the last few years. So in order to get a better return you need to look at mutual funds or stocks and naturally better returns equals greater risks.

Some more details about TFSA's:

Canadian residents age 18 or older can contribute up to $5500 annually (this increased from 5000 on January 1, 2013). Not only that, but if you haven't gotten one since it was introduced in 2009, you have what is called unused contribution room. (you have to be 18 during each year there is no pro-rating)

You cannot deduct this from your taxes and this  is one of the important ways that a TFSA differs from an RRSP.

Withdrawing funds from the TFSA is not taxable, the earnings are not taxable and even better it does not have any impact on income-based government benefits.

Some of the reading I have been doing suggests that TFSA's can be used as collateral for a loan.

TFSA's can generally be transferred to your spouse or common law partner in case of death- there are certain rules that apply.

Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.

Funds can be given to a spouse or common-law partner for them to invest in their TFSA. (note the government page that suggests this does not indicate any limits)

Be careful to not over contribute as that triggers certain tax consequences - see the extensive  rules & information on the Government of Canada ' s website (link is below).

Take the time to understand the consequences of withdrawing amounts. The government allows withdrawal and then that amount is added to your contribution limit BUT only in future years. If you withdraw and then re-contribute in the same year you may face a tax penalty.


Where do you get a TFSA?

Certainly all the banks offer them and then some additional financial institutions do as well. Since you may well accumulate significant funds it is important to research  all the offerings and consider the stability of each organization as well as the amount of risk you are willing to take in the kind of TFSA you acquire.

Links

Government of Canada www. tfsa.gc.ca