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Tax Free Savings Accounts (Registered)

Tax Free Savings Accounts (TFSAs) were introduced in 2009 and provide yet another tax-advantaged savings opportunity for Canadians. Some financial advisors feel that TFSAs are even better than RRSPs. While this is arguable, everyone certainly agrees that TFSAs are very valuable because the funds can be used for anything at any time.  They don't have the restrictions of other vehicles such as RRSPs (must be used for retirement) or RESPs (must be used for education expenses). Unlike RRSPs, TFSAs use after-tax dollars so there is no income tax deduction when you invest money in a TFSA. However, the returns on the investment are not taxed, so there is no taxable event when you used the funds to in the TFSA. In fact, some have recommended investing for retirement in a TFSA since you can then use the money, if necessary, for other purposes during your life without attracting penalties. For people with employer-matched RRSPs, this is certainly not a good financial strategy.

The best thing to do every year, of course, is to maximize your investments in BOTH your RRSP and your TFSA.  While some people have the income level and the discipline to accomplish this, most people have to choose between the two vehicles. While we would advise speaking to your financial professional to find the best solution for your, here are some factors to help you decide where to put your money.

Preference for RRSP investment

  • Employer-matching for RRSP

  • Behind on contributions for your age.

  • Not planning large purchase or other funds available for large purchase.

The preference for TFSA investment would be the opposite situations described above.  So, for example, if you are planning to purchase a house in the next 5 year and have no other funds available, then a TFSA can be used to save for that purchase.

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