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A TFSA is an investment account that is registered with the federal government. Within a TFSA, you can invest in a variety of assets — stocks, bond, mutual funds, and more. There are yearly limits to how much you can contribute to a TFSA. You don't receive a tax deduction for the money you contribute to a TFSA. Instead, over the lifetime of the TFSA, the money in the account grows tax free. Additionally, when you withdraw money from the account, you pay no tax on the proceeds.

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Should I contribute to an RRSP or TFSA?  How to pay less tax by adding TFSAs to your financial plan

[Michael 00:00] Today's topic is tax-free savings accounts or TFSAs. Let's take a look at the questions that we received. Question number one, what is a TFSA?

[Alex 00:11] Well, that's funny because tax-free savings accounts are a victim of a very unfortunate name. And it's funny, you know, many think of TFSAs as a special savings account, as in a chequing or savings account. So many folks are only holding cash in their TFSA, which really limits the potential benefit of a tax-free savings account. So TFSAs are actually a special investment account that are registered with the federal government; within this account, you can invest in a variety of different things — cash, things like stocks, bonds, mutual funds, ETFs and GICs. Which leads us to question number two, what are the benefits of a tax-free savings account?

[Michael 00:44] Great question. I mean, as its name implies, it's tax free, right? Shocking. I know. Over the lifetime of the TFSA the assets within the account grow tax free. It's very powerful, and it allows your assets to work as hard as possible for you, potentially maximizing compound growth. And to see how that works, check out the MD Compound growth calculator on our website, When money comes out of the TFSA in the future to fund whatever, you will also receive the proceeds tax free. So this leads to a misconception about TFSAs. Contributions to a TFSA are not, I repeat, not tax deductible. So this leads us to our next question, why don't we save or invest all of our money into TFSAs?

[Alex 01:27] That's the world I want to live in. I wish that was the case. We know that anyone that is 18 years old can open and contribute to a TFSA. However, there are limits on how much you can contribute. Your contribution limit is based on the calendar years in which you were 18 or older. And, interesting feature, if you withdraw from your TFSA — let's say $1,000 — you actually regain that contribution room back in the following calendar year. So that's pretty cool. You can find your exact contribution amount through the CRA account online or you can give them a call. Now before we wrap up, let's debunk a series of common TFSA misconceptions.

[Michael 02:00] So the first misconception being that TFSAs are for short-term savings only. I mean, this is partly true, right, while fine for short-term goals the benefit of tax-free growth, and the regaining of contribution room after withdrawals make TFSAs suitable for all goals. Short, medium or long term. TFSAs are actually one of the most flexible tools in a financial plan.

[Alex 02:22] The next misconception is contribution room — you use it, or you lose it! This is false. If you haven't contributed to a tax-free savings account, all that contribution room is building up and it's waiting for you.

[Michael 02:32] Next misconception — withdrawals from your TFSA count as income. This is super false! Tax free means tax free, the amount you withdraw won't be considered taxable income.

[Alex 02:43] The next one is that you can only have one TFSA. This is also false. You can have as many as you want, but the contribution limit is stretched across all the TFSAs. And it is your responsibility to keep track of the contribution so that you don't over contribute.

[Michael 02:54] For more information about TFSAs or to determine if it's right for you, please contact your MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.