The Tax-Free Savings Account (TFSA)

A TFSA is an investment account type that you can open with banks or major discount brokers that allows your money to grow tax-free. Typically investors pay taxes on profits made from their investments the year they are sold. In 2009, the government of Canada introduced the tax-free savings account as a mean to help people save more money and grow their investments completely tax-free. TFSAs are a fantastic option for youth looking to get into investing and are the #1 account type that we recommend for getting started. 

TFSA functions on a yearly contribution principle, meaning every year there is a fix maximum amount you can contribute to your account. Your TFSA allowance begins to accumulate as soon you turn 18 (as a Canadian citizen). The current allowance is $5,500/year. The following table depicts how the contribution amount (annual limit) has changed since implementation and the cumulative total if you were 18 or older in 2009.

TFSA Annual limits and Cumulative Total by Year

source: Wikipedia 

The Harper government raised the TFSA allowance to $10,000 during 2015, but when Trudeau won the election towards the end of 2015, the allowance was reduced back to $5,500 for the upcoming year. 

TFSAs are a great option for youth as they make things simple - no need to worry about taxes! Furthermore, the allowance amount is substantial enough for active young investors. TFSAs are also very easy to open and available as savings account with banks as well as with major discount brokers. Within your TFSA you can purchase any standard investment product. If you have to sell off your investments, your TFSA allowance will completely refresh the following year. For example, if you were 18 in 2009, and had maxed-out your TFSA at $41,000 by 2015 but needed to withdraw your savings to purchase a home, in 2016 you would be allowed to put back the full $46,500 (41,000+5,500 from the new year). 

So why care about TFSAs? When looking to grow your investments, you want to minimize anything that takes away from it, that includes fees and taxes! The RBC website has a great graphic to show the impact of how an investment can grow in a TFSA as opposed to a regular taxable account.

Source: RBC

With this example, over a 20-year investment period an investment would have grown to $194,964 in a TFSA, as opposed to $156,258 in a taxable account. This represents nearly a 25% increase. Money saved each year contributes to compounding, thus money saved generates more money from itself. No matter what your investment goals are, we highly recommend opening a TFSA as a first step to begin investing. We cannot say enough good things about TFSAs! 

Tips:

1. If you wish to invest in individual stocks, compare fees of trading with your local bank vs. opening a TFSA with a discount broker. The best option will depend on how often you are looking to trade and your investment amount. (link)
2. If you wish to invest in Index funds (owning a small portion of the complete market), there are two basic ways to go about it in a TFSA. (link)
3. If you wish to find out more information about TFSAs, click here for a link to the government of Canada's website.

- Yinvestors.


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