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How TFSAs Can Make You Rich

Tax-Free Savings Accounts have been touted as the most powerful investment option for Canadians since RRSPs were introduced more than 50 years ago.

On the surface, TFSAs are a simple personal savings program which allows Canadians over the age of 18 to contribute $5,500 per year into a plan and then withdraw the money, tax free.

Related: Ways To Save Inside Your TFSA

In reality, the rules about contributing and withdrawing from the plan are complex and so many of us don’t use it properly.

How TFSAs Can Make You Rich:

Personal finance expert Gordon Pape wrote the first book on TFSAs when they were introduced in 2009.  Earlier this year, Pape released an updated edition called, How TFSAs Can Make You Rich.

I had the opportunity to read the latest version, which is packed with useful information and strategies on how to make the most of your Tax-Free Savings Account.

Rob Carrick, personal finance columnist at The Globe and Mail, calls it, “The definitive TFSA owner’s manual.  I use it myself.”

The basics on TFSAs

In the book you’ll find the basic rules about how to open an account, what the contribution limits are, and how carry-forwards work from year-to-year.

Many of us use our TFSA as an emergency fund.  Pape agrees with the need to set aside a rainy day fund, and that sheltering your interest income is a better idea than having it taxed in a regular high interest savings account.

But Pape also says you should aim for higher returns in your TFSA.  While you don’t need to take needless risks with your TFSA money, you don’t need to be so conservative either, especially if you’re younger than 50.  Earning an extra percentage point will add thousands of dollars to your portfolio over the years.

TFSA vs. RRSP

Tax-Free Savings Accounts offer an opportunity for even modest income earners to build up a large nest egg over time.  Pape argues that, because of the low contribution limits on TFSAs, big savers are better off using RRSPs because they can shelter more money from taxes.

Related: Benefits Of TFSA vs. Non-Registered Accounts

You should also contribute to an RRSP before a TFSA if you expect to be taxed at a lower rate after retirement.  If your tax rate is likely to be higher than it is right now, as is the case for many young people, use the TFSA first.

If you belong to a pension plan, contribute to TFSAs to supplement your retirement savings, especially if you have little or no RRSP contribution room.

If you plan to buy a house, Pape suggests to save for your down payment in an RRSP rather than a TFSA and make use of the RRSP Home Buyers’ Plan.

(I disagree – First Time Home Buyer: HBP or TFSA?)

TFSAs for Seniors

If you’re not yet retired, Pape says to give careful thought to what your income is likely to be after you stop work and how much tax you’ll pay.  It will help you decide whether or not to make any more RRSP contributions.

If you plan to move after you retire, check the tax rates in the province to which you are relocating.

Invest any unneeded RRIF withdrawal money in a TFSA, up to your annual limit.

Related: Using Tax Free Savings Accounts In Retirement

Other TFSA Strategies

Splitting income – Pape says TFSAs can be used to split investment income between you and your spouse, which can potentially save thousands of tax dollars over the years.  Get your spouse to open a plan as well, to double the tax saving potential.

Estate planning – Move assets from non-registered accounts into TFSAs to reduce taxes at death, beginning with securities that are likely to appreciate most in value.  Name your spouse the successor holder when you open your TFSA.

Early withdrawals – Consult a financial professional before deciding whether to make early withdrawals from an RRSP and RRIF in order to make TFSA contributions.

Loan collateral – TFSAs can be used as collateral for a loan, and the interest may be tax-deductible if the money is used for investment purposes.  If you are experienced and knowledgeable, you can take advantage of this to increase the size of your investment portfolio through leveraging.

Related: Is Your Investment Loan Tax Deductible?

Final thoughts

That just scratches the surface on what to expect from, How TFSAs Can Make You Rich.  From there, Pape describes how to invest in your TFSA and includes sample portfolios for different types of investors.

He spends 32 pages answering reader questions he’s received over the years, from basic to complex.  The book then takes a look at four fictional couples and how they can end up with over a million dollars in their TFSAs.

It ends with two quizzes on how much you’ve learned about TFSAs – a beginner and an expert quiz.  The expert quiz was tough!

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59 Comments

  1. James Robinson on May 19, 2013 at 8:41 pm

    TFSA works well when you have a situation where your present tax obligations are lower than they would be later in life. For instance a year when you don’t have much taxable income.

  2. Andrew Wade on May 19, 2013 at 9:42 pm

    For me, the TFSA works well as a non-taxed bank account for funds I may need to draw on in a month or two’s time. I am nowhere near the limit, so I can put in and take out what little cash I have without worrying about hitting the limit.

  3. Joel on May 19, 2013 at 11:32 pm

    I am using the TFSA (as well as my RRSP) for a downpayment. As soon as I purchase a home my investment strategy will change as I will be more willing to take on risk in order to get higher tax-free returns!

    I particularly like how you can withdraw money and recontribute it the following year, i.e. you don’t lose the contribution room.

  4. Canadian Budget Binder on May 20, 2013 at 4:21 am

    We both have a TFSA and although I’m not maxing my TFSA out at the moment my wife is. The plan is since we will be mortgage free by June this year we will then focus on building up the investments. I will be going back and investing the max amount in my TFSA and looking at other investment products for my portfolio. If it makes me rich, heck I won’t complain. Thanks for the review on the book. Mr.CBB

  5. Dee Evans on May 20, 2013 at 4:49 am

    I just sold my house which had provided me with rental income, but not enough to cover my living costs. With the proceeds I have paid off all my debt and opened a TFSA to hold high dividend paying stocks. I still have some open RRSP room, but probably won’t have any income this year, so I won’t be contributing to it. In these circumstances, I wish I could transfer my unused RRSP limit to my TFSA limit and invest a greater amount in my TFSA. Thanks for all the interesting and useful columns! You are right, being debt-free is the best feeling in the world!

  6. orange on May 20, 2013 at 4:58 am

    interesting article. learned a lot that I wasn’t aware of regarding tfsa

  7. Northmoon on May 20, 2013 at 5:39 am

    I wish more investment gurus would use examples of single people as well as couples. Not everybody is part of a twosome. Perhaps he does, but it doesn’t sound like it.

    That said I’d still like to win a copy of Pape’s book. Thanks for the giveaway!

  8. TobyJr on May 20, 2013 at 5:43 am

    I like that the rules surrounding TFSA’s are relatively simple and that unlike RRSP’s, I don’t have to worry about having to pay back taxes when they are cashed in

  9. James on May 20, 2013 at 6:01 am

    With a pension on board I prefer the idea of a TFSA. I read that if a TFSA grows to double it’s original yearly max (5500 to 11000) this is the persons new “limit”. Anyone else heard of something similar?

    • Echo on May 20, 2013 at 10:02 am

      @James – Not exactly. Say, for example, you contributed $10,000 to your TFSA and that amount grew to $14,000. If you withdraw the $14,000 then you can contribute that amount, plus next year’s contribution room the following calendar year. That mean’s you’ve created an additional $4,000 worth of contribution room.

      This is why many people advocate investing for growth within your TFSA. But be careful because aiming for higher returns doesn’t come without risk and you can’t claim a capital loss on investments within your TFSA.

  10. Kitty on May 20, 2013 at 6:02 am

    I really hate that with TFSA’s you have to wait till January the following year to get your contribution room back when you withdraw. I don’t see any practical reason for this other then the government getting a revenue boost from the penalty on over contributions.

  11. John on May 20, 2013 at 6:12 am

    I really appriciate TFSA’s for seniors. My parents don’t get any tax deferral benefits from RRSP’s so TFSA’S are a great place for them to save.

  12. Gary on May 20, 2013 at 6:15 am

    I wish they had TFSA’s when I was young and not retired but they are still great to move unregistered funds into. I love getting interest and dividends tax free. People with defined benefit pensions will love them.

  13. Sandra on May 20, 2013 at 6:24 am

    Great for extra savings since I have almost no room in a RRSP because of work pension contributions.

  14. Andrew on May 20, 2013 at 6:25 am

    I just started using TFSAs this year as my RRSP room is diminishing. I read David Chilton’s comparison of RRSP vs TFSA and was blown away by the potential benefits. I will max out my TFSA from now on even though the tax benefit is hard to give up!

  15. Rosemary Wells on May 20, 2013 at 6:27 am

    Thank you Rob, for this TFSA article and book mention. I am always looking for answers and explanations and appreciate Pape’s writing style. Boomer and Echo, keep up the good work! Also a shout out to John Anderson who added some interesting info and comparisons.

  16. Lisa Henderson on May 20, 2013 at 6:53 am

    There are a few things I love about the TFSA. I love using mine as an emergency fund. I can get the money in 5 business days (if I cash it in online), which is fast enough for an emergency (I have enough credit available to cover me if I need it to for the 5 days), and yet it is difficult enough that I don’t dip into it all the time.
    I like the fact that it’s tax free. Really when you think about it, if you can avoid dipping into it at all, sometimes its a better deal than RRSPs. Yes you don’t get the deferred tax benefits, but you also don’t pay tax on the interest.
    I do wish there was a larger contribution level (however, I am no where near maxing mine out each year–I wish I could), but reality is the tax dollars have to come from somewhere, so I do understand the reasons for the limit.
    Overall I think they are a great tool, and I’d love to read this book to see how I can utilize them better!

  17. My Own Advisor on May 20, 2013 at 6:57 am

    TFSAs are excellent to earn tax-free dividends from Canadian dividend paying stocks. Yes, you lose the Canadian dividend tax credit doing so, but the upside is years if not decades of compound growth in your TFSA thanks to Canadian companies that reward investors.

    It’s the best get rich eventually account any Canadian could ever own.

  18. Lisa Henderson on May 20, 2013 at 6:57 am

    I also subscribe to receive new posts by email. Thanks!

  19. Sandra on May 20, 2013 at 7:00 am

    I put blue-chip stock into my TFSA in 2009. This money came from a non-registered account. I have continued to do this. What a boost. Investment savings accounts are a waste. Go big or go home!

  20. Bryan on May 20, 2013 at 7:33 am

    As a fairly young investor (26 years old) I am about to buy my first house and the entire down payment came from my TFSA. The $5000 limit (now upped to $5500) gave me a goal to hit every year. I think the limit is excellent for young people still in school or fresh out of it, as it is a reasonable and attainable annual goal.
    The other big perk I enjoy is that once I withdraw from the account, the interest and principle amounts can be placed back into the account in subsequent years. This will be great once I empty the account in a month, and start saving again next year.
    I am very grateful and thankful to be a part of a municipal job that has a pension, but this restricts the RRSP contribution room I have, so the past 2 years I maxed out with only a couple hundred dollars.
    I would love to win this book and delve into some more useful strategies to squeeze every penny out of my TFSA.
    Thanks as always for a great article!

  21. Charlene on May 20, 2013 at 7:45 am

    I really appreciate this particular posting. I learned the hard way about the “rules” within a TFSA to the tune of a $500 tax penalty. Luckily my accountant was able to appeal the penalty to my benefit. Now I am very careful about contributing and withdrawing funds in the same year. I hope I win the books! I sure could use them. Thanks for another great article 🙂

  22. Michelle on May 20, 2013 at 7:45 am

    I just started using TFSA’s this year. My accountant gave me heck for not having one so now I have three accounts! I love them for an emergency fund and for vacation savings. The ability to move money around where and when I want to is fantastic!

  23. Bigden on May 20, 2013 at 7:55 am

    In terms of tax planning TFSA’s are it!

    For those just starting a career and at the low end of their earnings potential, contributing the maximum (or as much as possible) to their TFSA each year is a no-brainer. If you still have disposable income then pay of any debts. Forget about contributing to an RRSP at this time. What you say…forget about the tax refund? Yes! At this point in your career your taxable income will be much less than it will be say 10 years into the future. Hold-off on the RRSP contribution until the point in time your tax rate is higher. For example, if your current tax rate is 31% today, you would receive a tax refund of $0.31 for every dollar you contribute to your RRSP. If your future tax rate will be higher (i.e. your annual income increases over the years) and your future tax rate is 50%, you would receive a tax refund of $0.50 for every dollar you contribute to your RRSP at that time.

    Where will this future contribution come from? The tax free money you have saved in your TFSA!

    This is the best of both worlds. Use your TFSA to save for future RRSP contributions and receive a larger tax refund down the road.

  24. Danny on May 20, 2013 at 8:11 am

    Best feature is tax free appreciation on interest, dividends, and capital gains.

  25. RayH on May 20, 2013 at 8:18 am

    Love the tax free nature of the TFSA. I plan to use with my pension to minimize taxes.

  26. Freelancer on May 20, 2013 at 8:54 am

    As a lifelong freelancer, with variable income, it’s hard to find the money to find a TFSA. Luckily I have a forced contribution to an RSP due to my profession. I know too many colleagues who withdraw from their RSP during lean times though.

    Hoping once I’m mortgage free, I’ll be able to fund a TFSA.

  27. Nicole on May 20, 2013 at 8:54 am

    Thanks for the info. Does anyone know at what age you can set up a tsfa for a child?

    • Echo on May 20, 2013 at 9:49 am

      @Nicole – You can’t open up a TFSA or contribute to one until you’re 18.

  28. Lynn on May 20, 2013 at 8:55 am

    I love the simplicity and flexibility of the TFSA program.

  29. HP on May 20, 2013 at 9:04 am

    What I like about the TFSA – How the govt recently increased the contribution room.

    What I don’t like as much: I wish they continue raising it (more often) as I cannot contribute much to my RRSP due to clawbacks.

    LOVE the idea that I do not have to pay taxes on gains realized.

    Also like the notion that I can buy different vehicles for investments from my TFSA brokerage account and am not just relegated to GIC’s and the like. Sure the risk increases with stock purchases, but that is something I am willing to take the bite for …

  30. Koala on May 20, 2013 at 9:14 am

    I like having a tool to improve my future net worth while having no taxable income now.

  31. Jesse on May 20, 2013 at 9:18 am

    My wife and I are using it for emergency savings while on mat leave, but will be thinking more long term afterwards with it.

  32. krantcents on May 20, 2013 at 9:27 am

    In the U.S. we have Roth IRAs which defer taxes and you can withdraw tax free. I max out my traditional tax deferral schemes and the Roth as a hedge. I have no idea if I will be in a higher tax bracket, but I can always use tax free income.

  33. Mike on May 20, 2013 at 9:32 am

    I am turning 53 this year and I am starting to make greater use of the TFSA with my wife so we will have more say on our retirement funds

  34. Cathy on May 20, 2013 at 9:47 am

    TFSAs are a great complement to the RRSP program, providing another layer of flexibility and options for the average person to take advantage of. With a little thought and research, you can make investment decisions geared toward your own specific situation, maximizing your potential returns and minimizing taxes. The TFSA has greatly improved the average investors available options. And that’s a good thing!

  35. Bernie on May 20, 2013 at 9:53 am

    I think the TFSA is the best thing our government has offered to us in decades! I’m an avid reader of your blog and would love to read Gordon Pape’s new book 🙂

  36. Anne Pinteric on May 20, 2013 at 11:10 am

    My dividend paying stock creates a cash accumulation which I will reinvest back into the plan. I like the TFSA better than the RRSP, as it is more flexible.

  37. Sam Jhangiani on May 20, 2013 at 11:32 am

    Wonderful article. Kudos to John Anderson too for the examples he wrote.
    Everyone over 18 should have one. Better than Beer in the long run 🙂
    P.S. Enter me in the draw for Gordon Pape’s new book. Thanks.

  38. Gary on May 20, 2013 at 11:46 am

    Echo ——- please don’t put my name in the draw as I was a lucky winner last year. thanks.

  39. Eleanor Huyatid on May 20, 2013 at 12:29 pm

    TFSA makes savings a lot interesting and it helps me get motivated to save more. It’s a great program but I wished the government will increase the limit.

  40. Simon on May 20, 2013 at 1:24 pm

    TFSAs are great because of their tax-free status which makes investing in more complex products like REITs, ETFs, DRIPs, etc much more accessible, avoiding any complicated tax implications.

  41. David W on May 20, 2013 at 1:54 pm

    Invest yours TFSA in an ETF and reduce your MER. Stop making the banks rich!!

  42. Ahmad Sajwani on May 20, 2013 at 2:06 pm

    The fact that I can choose the risk level and not get taxed on the returns makes TFSA my first choice for savings.

  43. Eric on May 20, 2013 at 4:05 pm

    I like TFSAs for the flexibility. And despite the small contribution limits, it’s only a matter of time before you can amass a sizeable portfolio in a completely tax sheltered vehicle. What’s not to love?

  44. Irene Schoenberger on May 20, 2013 at 6:42 pm

    I like it because it is a great savings vehicle that doesn’t tie you down like an RRSP.

  45. Eric on May 20, 2013 at 8:06 pm

    Now that I’ve purchased my first house I’m using the TFSA for my extended emergency fund for repairs and extras. I like the goal it givesme to max out my limit while still having access to funds without tax implications if needed.

  46. Hal on May 20, 2013 at 8:26 pm

    TFSAs appear to be one of the most flexible vehicles for investing that have appeared in some time.

  47. Nancy on May 20, 2013 at 8:27 pm

    Tax Free Investment Account would have been a better moniker.

  48. glenn on May 21, 2013 at 6:53 am

    Didn’t know about this new book. If I don’t win one I’m going to pick one up and bringing to work. Everyone at work is so clueless on TFSAs.

  49. Bet Crooks on May 21, 2013 at 11:08 am

    TFSAs are very useful for investing and saving. For people with over $5000 to save they can be very profitable.

    I wish, though, that the CRA still had the old deduction allowing people to exclude their first $1000 of interest income from their taxes. For people with very small amounts of savings the old deduction offered a much simpler solution than setting up a TFSA.

  50. Denis on May 21, 2013 at 11:40 am

    You can have different investment types than just a regular savings account in a TFSA? REALLY???? Ok it is time for me to go look at that at my bank where I have my TFSA! I have what I will say is shite interest growing my TFSA. I think about a dollar since I first put in money about 3 years ago…

    This blog always teaches me stuff that is important!

  51. Ed on May 21, 2013 at 11:43 am

    TFSA’s are perfect, in my opinion, for younger people who aren’t near their maximum tax bracket. I would much rather invest my money using post-tax values and have the interest back to me tax-free. There are no limits on withdrawal amount or timing, so we hope to use our TFSA during retirement to help fund vacations and other non-necessities through retirement and have our RRSP’s fund the day-to-day costs.

  52. michelle on May 21, 2013 at 12:56 pm

    I’d love to get a copy of this book – i just started investing within my TFSA this year and feel I have tons to learn still. I love that I can receive tax-free gains within the account, but I’m currently saving for a down payment and want to use that money within the next 5 years, so risk is a big factor for me.

  53. daftster on May 21, 2013 at 1:00 pm

    I like it because most of discount brokerage offer no fee tfsa. Good for new investors!

  54. Michael O'Byrne on May 21, 2013 at 6:59 pm

    Great to see this being discussed. I get the impression that many people just shunt the funds into a tfsa and then leave it alone.

  55. Lyne on May 22, 2013 at 8:32 am

    I just love the tax-free part!

  56. melanie on May 23, 2013 at 9:37 am

    Thank you for your posts. Always informative. I will have to look at the TFSA more in depth. I am thinking that we should reduce our RRSP as both my husband and I will have good pensions and think of throwing the money into a TFSA instead.

  57. Harry @ Smart Money Junction on May 26, 2013 at 4:10 am

    I think TFSA’s are a decent tool when it comes to saving on the amount that goes towards tax but it depends on personal choices and what one feels comfortable with.

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