Understanding TFSAs: The 8 Benefits (And 3 Drawbacks) of TFSAs | PlanEasy (2024)

FAQs

What are the drawbacks of TFSA? ›

Unfortunately, TFSA contributions can't be used to lower your taxable income. This means there is no way to decrease your income tax when contributing to a TFSA. For high income earners this makes an RRSP more appealing.

A TFSA allows you to set money aside in eligible investments and watch those savings grow tax-free throughout your lifetime. Interest, dividends, and capital gains earned in a TFSA are tax-free for life. Your TFSA savings can be withdrawn from your account at any time, for any reason¹, and all withdrawals are tax-free.

What is a TFSA? A tax-free savings account (TFSA) should really be called a tax-free investment account. That's because it is a registered account that allows you to hold not only savings, but also stocks, mutual funds, guaranteed investment certificates (GICs), bonds and exchange-traded funds (ETFs).

Holding a volatile investment in a TFSA can be risky for a couple of reasons: First, if a capital loss is realized, that loss cannot be used to reduce other taxable capital gains you may have. Second, only the amount withdrawn can be added back to TFSA contribution limit the following year.

TFSAs have annual contribution limits. Before you start investing in a TFSA, make sure you know what your contribution limit is. For 2024, the TFSA contribution limit is $7,000. If you were eligible to contribute in previous years but didn't do so, that unused room gets added to the current year's room.

There are lots of good reasons to use a TFSA in retirement. You can keep contributing to a TFSA for as long as you live, unlike an RRSP which you must convert to a RRIF at age 71. If you have more retirement income than you need, you can place it in your TFSA, providing you have contribution room.

The key advantage of a TFSA is that any earnings from these investments—whether dividends, interest, or capital gains—are tax-free. You can also typically withdraw contributions, earnings and gains from the account without incurring taxes.

You can withdraw funds from your TFSA any time you want¹ and you don't have to reach a certain age before you withdraw your money. Withdrawals made from your TFSA will be added back to your TSFA contribution room the following year. Your financial institution can help you make withdrawals from your TFSA.

The most common TFSA mistake

If cash makes up the majority of the money you have in your TFSA, you aren't doing it right. But don't worry! You're not alone in making this mistake. Despite its name, a TFSA is not meant to function as a traditional savings account.

Why am I losing money in my TFSA? ›

Yes, you can lose money on a TFSA, but it is easy to avoid losing your money. Typically, people who lose their money on a Tax-Free Savings Account are people who are using it for more volatile investments or people who are over-contributing.

One financial planner calls the first four months of the year a “danger zone” for making deposits to tax-free savings accounts. During this period, Canada Revenue Agency info that shows TFSA contribution room for the current calendar year can be based on incomplete information.

No tax deductions: The biggest drawback of a TFSA, is that your contributions are made with after-tax dollars and are not tax deductible, unlike the FHSA and RRSP. Contribution limits: Though there is no lifetime maximum contribution limit, there is an annual contribution limit, stipulated by the Government of Canada.

No tax on earnings: Any income, capital gains and dividends you earn in a TFSA are yours – you won't be taxed on what you earn. No penalties for withdrawals: You can take your money out whenever you need it (subject to the type of investment you've made), which is good if you need access to your money quickly.

Many tax experts would advise U.S. citizens to avoid investing in a TFSA because it is not considered a tax-sheltered account by the IRS. If you invest using a TFSA as a U.S. citizen, you won't get to enjoy the tax-free benefits because all your investment gains will remain taxable when you file taxes in the U.S.

Yes. The assets in your TFSA are like any other investment, and they can lose value over time. You can actually lose contribution room too.

No tax deductions: The biggest drawback of a TFSA, is that your contributions are made with after-tax dollars and are not tax deductible, unlike the FHSA and RRSP. Contribution limits: Though there is no lifetime maximum contribution limit, there is an annual contribution limit, stipulated by the Government of Canada.

How much can I contribute to my TFSA? The TFSA annual contribution room for 2024 is $7,000. You can also carry forward any unused contribution room from previous years.