Ways To Save Inside Your Tax Free Savings Account

When the tax free savings account was introduced back in 2009, it was mainly promoted by the banks as a high interest savings account.  Since then, people have realized the tremendous potential of the TFSA for a variety of savings goals.  Let’s take a look at three ways to save inside your tax free savings account:

Playing It Safe

Just like the banks originally intended, many people are comfortable just playing it safe with their tax free savings account.  It’s the perfect place to build an emergency fund since it’s simple to make monthly contributions to a savings account within your TFSA.

The nice thing about using your TFSA as an emergency fund is that you’re able to withdraw your money relatively quickly when you need it, but the extra steps required to access your funds from within your TFSA should deter you from making frivolous withdrawals.

You can withdraw money at any time, and you won’t be required to pay tax on the interest earned inside your tax free savings account.  Any money withdrawn will be added to your TFSA contribution room the following year, which is perfect for replenishing your emergency fund.

Short Term Goals

Short term goals can be defined as something 1-3 years in the future.  Whether you are saving up for a new car, a vacation or a downpayment on a house, your TFSA is a great vehicle for your short term savings goals.  Instead of a high interest savings account paying a measly 1% interest, if you have a specific savings goal you should consider a GIC, which are currently paying up to 2.6% interest on a 3 year term.

If you’ve already earmarked your savings towards a specific goal, especially for a downpayment on a house or to finance education expenses, the stock market is probably the last place you want to put your money.  Preservation of capital is more important than risking your money trying to earn an extra few hundred dollars.

While fixed income products like GIC’s aren’t the sexiest investment out there, you’ll have the peace of mind knowing that your savings are still intact when you need it.

Taking a Long Term Approach

Your tax free savings account has great potential as part of your long term savings strategy.  While most people viewed the $5,000 annual contribution room as too low for any significant investment opportunities, experts are now accepting the tax free savings account is a viable alternative to making RRSP contributions.  While that calculation depends on your specific tax situation now and when you reach retirement age, the TFSA can certainly be used to complement your RRSP.

When you consider that along with your spouse you have $10,000 in annual contribution room, the tax free savings account becomes even more attractive when investing for the long term.  And when you compare investing in a TFSA vs. a non-registered account, the fact that you don’t have to pay capital gains tax is a clear advantage for the TFSA.  Although it’s worth noting that the TFSA is not eligible to claim a capital loss either.

By maximizing your TFSA contribution room to invest in dividend stocks or REIT’s each year in your 20’s and 30’s you can build up your investment portfolio to a significant amount when it’s time to retire.

Tax Free Savings Account – What’s Right For You?

No matter how old you are, or what you’re saving for, you should be taking full advantage of your tax free savings account.  It’s a great savings vehicle for building your emergency fund, and can be used to preserve capital for short term savings goals like a downpayment on a house or for a new vehicle.

Finally, if you have those bases covered and have figured out how to invest your money for the long term, you can use your tax free savings account as a stand alone or as a complement to your RRSP when investing for retirement.

How do you make the most out of your tax free savings account?

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  1. My University Money on July 27, 2011 at 8:47 am

    I specifically like two different parts of the TFSA. The first part is that brokerages can easily open up TFSA accounts so you can trade within your TFSA (even though I’m not much of a trader).

    The other part I really like is that the contribution room accumulates so that when times are lean right now, and I’m not able to use it all, I can make use of it later when my income increases. This is also useful with the huge generational transfer of wealth that is underway. If you inherit money you can put a large portion of it (I guess “large” if you’re from a humble background like mine anyway) in the TFSA and avoid having to invest it in a non-registered account.

    • Echo on July 27, 2011 at 9:38 pm

      @My University Money
      I agree, once the discount brokerages started allowing trading accounts the TFSA became more advantageous.

      Poeple complain that the contribution room is too low, but I’m with you…there’s loads of room that will build up over time. I’m maxing out mine right now, but I haven’t contributed to my wife’s yet.

      • My University Money on July 28, 2011 at 7:53 am

        The Cons are talking about a possible 10,000 ceiling. I couldn’t come close to using all of this right now, but I love the idea that when I start hitting my top pay bracket I will essentially be able to invest tax free.

  2. Wes on July 27, 2011 at 10:29 am

    Great way to break it down; giving both short and long-term approaches. They are definitely something we should all be thinking about for our future.

  3. Brad Mol on July 28, 2011 at 12:53 pm

    Nice article Echo. The TFSA’s are a flexible tool and you’ve summarized nicely a few of the ways they can be used. Hopefully the Conservatives will raise the contribution limits. They said they would when the budget was balanced (2014 or 2015), but that would entail them winning another election before they can follow through!

    Our most recent newsletter included a short comparison of TFSAs to RSPs as well as a case study. Here’s the URL.


  4. The Wealthy Canadian on July 30, 2011 at 4:43 pm

    My wife and I have decided to use both our TFSAs and RESP contributions to fund our kid(s) education. We anticipate the money for a child’s education to be quite high in 17 years so we are going to play it safe.

    Right now we are buying long-term blue chip plays for one account and a higher-yielding stocks for the other.

    If we weren’t planning on using our TFSAs for this specific reason, I think I would probably go after a solid value stock that showed lots of potential. At least that way, any capital gains would not be taxed.

    Nice post!

    • echo on July 30, 2011 at 5:57 pm

      @The Wealthy Canadian
      Sounds like we are using a similar approach. I’ll have a post next week about our plans for RESP’s, but I definitely like how you are using a blended approach.

      Thanks for stopping by!

  5. STU on August 9, 2011 at 12:13 pm

    Another way to save in your TFSA’s is fill them with dividend stocks and withdraw the tax free cash monthly for income or taxable account investments. This boosts your contribution room next year by quite a bit. My July statement shows I’ve withdrawn $1092.00 so far which annualized would be $2184. I can add that to next January’s contribution. I will then transfer the approx’ total of $7184 from my taxable account into my TFSA. I’ll do this for my wife’s account as well. The one downside is that when transferring stocks you trigger a capital gain as this is deemed as a sale of the stock. Still, this is a small price to pay over the long haul.

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