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Tax PlanningYour Guide to TFSAs and Retirement


This article was reviewed by Jay Brecknell, CFP®.

What is a TFSA?

A TFSA, or Tax-Free Savings Account, is a way for you to set money aside tax-free during your lifetime. Sounds great, right? It is! There are lots of benefits to using a TFSA that we’ll cover in this article.

The unique thing about a TFSA account is that both the amount you contribute and any income earned in the account, such as investment income, is tax-free, and stays tax free even when you withdraw money. That means your money can grow tax-sheltered!

In short, a TFSA is a great place to invest money without worrying about getting taxed on it. There are a few misconceptions around TFSAs that we’ll get to later, but first, let’s talk about how you can contribute to your TFSA.

Contributions and Contribution Room 

The requirements to open a TFSA are simple: you must be at least 18 years old and have a valid social insurance number. That means most Canadians are eligible, and nearly everyone can benefit from having a TFSA account.

If you are an American citizen, take note — TFSAs are not an option for you. A TFSA is not recognized by the USA, so your investments would be taxable on your American tax return.

When it comes to contributions, things get a little trickier. The TFSA system first started in 2009, and each year allows you to contribute more into your account. The following table breaks down how much money you can contribute every year, as well as the updates in TFSA contribution room since they were first created.

So what does this mean?

Since TFSAs were instituted in 2009, every passing year increases the amount of money you are eligible to contribute, provided that you are older than 18. Essentially, if you were 40 years old in 2009, your contribution room has been growing, even if you haven’t used it yet. However, if you were younger than 18 in 2009, your contribution room only began growing once you turned 18.

It can look confusing, but the situation is very straightforward if you were already older than 18 in 2009. If that’s you, good news! Even if you’ve never opened or contributed to your TFSA, you can start the process today and contribute $81,500.

Further Reading: Demystifying The TFSA

Maximizing Contributions

When maximizing the benefit of your contributions, especially if you’re at a later stage in life and haven’t used your TFSA yet, you have some options to consider.

While you could just put your maximum into your TFSA account, that might not be the best possible use of your money. An important point to consider when using your TFSA is how much you are earning. If you earn a high taxable income, which would be an income of over $80K per year, we would typically prioritize contribution to RRSPs over TFSAs for your situation. If you’ve already maximized your RRSP room and still have more savings ability, then we’ll look at TFSAs.

If you have a lower income than $80K per year, we’ll prioritize TFSAs over RRSPs.

At Cedar Rock Financial, we often see people build up room during their pre-retirement years and use their TFSAs for items like an inheritance or company buyout. Whatever your situation, we’re here to help and chat further to discuss your options.

TFSAs and Investments

Did you know? TFSAs can be used for investing!

While we mentioned this at the beginning of the article, we’re going to break it down further here. The most important thing to know is that you can use a TFSA similar to an RRSP. That means you can use them to invest in GICs, Mutual Funds, ETFs, Stocks, Bonds, REITs, etc. And the best part is that whatever money you gain by investing is tax-sheltered!

For tax efficiency, we try to prioritize Canadian stocks and bonds over American stocks because you would still be charged USA withholding tax on the American stocks.

However, be careful when owning high risk investments in your TFSA (except when this fits your investment profile), because if the investment ends up losing money then you are essentially losing TFSA room. It’s better to own high risk investments in a non-registered account so if they lose money then you can use the capital loss.

Further Reading: Guide To RRSPs For Retiring in Canada

Common Misconceptions

There are some misconceptions surrounding TFSAs, and we’re going to clear those up so that you can make the most of your accounts.

TFSAs have been marketed by banks as savings accounts. Banks chose to do this to try and attract more deposits, but using your TFSA as a savings account is not the most effective way to benefit from it. This mindset has led to people thinking that TFSAs are short term savings vehicles (such as for trips or home renovations), but TFSAs are not the best source for an emergency fund or financing short term goals.

This is especially true if you’re in a later stage of life. At Cedar Rock, our goal is to use TFSAs last when it comes to withdrawing money, since it is the best asset to pass onto the next generation if you don’t end up needing the funds in your lifetime.

When you use your TFSA as a savings account, most of the funds are deposited into a high interest savings fund that earns very little interest (approximately 0.25%). It’s much better to own higher earning investments like stocks or equity funds that earn higher rates of return and can therefore be tax sheltered (if that fits your investment profile).

Next Steps

Ready to open your TFSA account? They’re a great way to shelter your money tax-free and available to most Canadians, so take advantage of tax-savings today.

If you have further questions or want to open your own TFSA account, reach out to myself or Jay to book an appointment. We can’t wait to chat with you and discuss your financial options to make sure you’re getting the most out of your money.

In the meantime, take a look at our handy eBook to learn the best steps towards having a stress-free retirement!