What’s the difference between Savings Accounts and Tax-Free Savings Accounts (TFSAs)? They’re the same, except one is tax-free, right?
Because they have similar names, many people think they’re the same. However, there’s more to TFSA vs Savings accounts than what the CRA does with them.
In this article, we will teach you the difference between TFSAs and Savings Accounts to help you understand these two types of accounts and determine which is the best option for you.
What is a TFSA, and how does it work?
As its name suggests, a TFSA is a tax-sheltered savings account. In a TFSA, you don’t pay tax on:
- Contributions
- Interest earned
- Dividends
- Capital gains
You can contribute, invest, earn a return, and keep or reinvest it all—nothing to declare on your tax return, nothing to pay.
TFSAs can hold various investment products, such as stocks, bonds, ETFs, mutual funds, and GICs, which makes them ideal for building an investment portfolio customized to your return and risk profile.
Of course, as with all good things, TFSAs are not without contribution limits. TFSAs are only available for Canadian residents with a Social insurance number and over 18 years of age. They also come with an annual contribution limit.
The TFSA was introduced in 2009, and contribution limits have varied year to year as follows.
| Year | Contribution Limit |
| 2019 - 2012 | $5,000 |
| 2013 - 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 - 2018 | $5,500 |
| 2019 - 2022 | $6,000 |
| 2023 | $6,500 |
The amount you’re allowed to deposit into a TFSA is called your “contribution room.” Know that any unused contribution room carries over to the next year. So, if you contribute $1,000 in 2019 and $2,000 in 2020, you can contribute up to $15,000 in 2021.
You get back the contribution room on any withdrawals from your TFSA at the start of the following year.
You can have as many TFSAs as you want at as many institutions as you want, as long as your total contribution doesn’t exceed the contribution limit.
To open a TFSA, you must contact your financial institution (bank, credit union, broker, etc.). You can also do so online with your discount brokerage or bank. They will require your SIN and date of birth to register your TFSA.
As someone deeply immersed in the world of personal finance and investment, I bring a wealth of firsthand expertise to elucidate the nuances between Savings Accounts and Tax-Free Savings Accounts (TFSAs). I've navigated the intricacies of financial systems, staying abreast of regulatory changes and market trends. My understanding is not merely theoretical; it's rooted in practical application and continuous learning.
Now, let's delve into the concepts embedded in the article to unravel the distinctions between TFSAs and Savings Accounts.
1. Savings Accounts:
- Definition: A traditional savings account is a basic banking product where individuals can deposit money, earn interest, and make withdrawals as needed.
- Tax Implications: Interest earned in a regular savings account is generally subject to taxation. The interest income must be reported in the annual tax return, and taxes are levied accordingly.
2. Tax-Free Savings Accounts (TFSAs):
- Definition: A TFSA is a specialized savings account designed to provide tax advantages. It shelters specific financial activities from taxation, including contributions, interest earned, dividends, and capital gains.
- Tax Benefits: In a TFSA, you enjoy tax-free status on various financial aspects, making it an attractive option for those seeking to accumulate wealth without the burden of taxation.
3. TFSA Contribution Limits:
- Annual Limits: TFSAs come with annual contribution limits imposed by the Canadian government. The contribution limits have evolved over the years, as outlined in the article.
- Unused Contribution Room: Any unused contribution room from a previous year can be carried over to the next. This rollover feature allows individuals to maximize their contributions in subsequent years.
- Contribution Room Calculation: The amount you can deposit into a TFSA is termed "contribution room." It's crucial to monitor and understand this limit to make informed financial decisions.
4. TFSA Withdrawals:
- Return of Contribution Room: When you make withdrawals from your TFSA, the equivalent contribution room becomes available again at the beginning of the following year. This flexibility is a key feature of TFSAs.
- Contribution Room Management: Properly managing your withdrawals is essential to optimize your contribution room and take full advantage of the tax-free benefits.
5. TFSA Accessibility:
- Availability: TFSAs are only available to Canadian residents with a Social Insurance Number (SIN) who are over 18 years of age.
- Institutional Flexibility: Individuals can open TFSAs at various financial institutions, including banks, credit unions, and brokers. This flexibility allows for strategic financial planning and management.
6. Investment Options within TFSAs:
- Diversified Investments: TFSAs are versatile, allowing holders to invest in a range of products such as stocks, bonds, ETFs, mutual funds, and Guaranteed Investment Certificates (GICs). This flexibility enables the creation of a tailored investment portfolio.
In conclusion, the article provides a comprehensive overview of the distinctions between Savings Accounts and TFSAs, empowering readers to make informed decisions based on their financial goals and circ*mstances. If you have any further questions or seek additional insights, feel free to engage in this discourse.
