TFSA Explained: A Simple Guide to the Tax Free Savings Account

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The TFSA or Tax Free Savings Account is a special investment account in Canada that allows you to shelter your investments from tax, effectively letting you keep a lot more of your investment profits. This account is awesome, everyone should have one! 

The TFSA is so versatile and fairly easy to understand which makes it an excellent investment account for beginners and experts alike. In this video I explain why you should have a TFSA, what it should be used for, the rules and misconceptions so you don’t make any mistakes, and how you can open one.

The first thing to understand about the TFSA is that it is NOT really a savings account. It’s an investment account. It is designed to hold investments inside of it. If you just stick money into a TFSA it’s going to sit there and do nothing like me on a Sunday afternoon. You need purchase investments with the money that you put inside the account in order to use the TFSA’s special benefits.

What are those special benefits? The TFSA is a tax sheltered account which essentially means your investment profits and income are protected from being taxed.In Canada, when we profit off of an investment, let’s say I bought a stock for $10 and sold it for $20, this profit is called capital gains (some kind of screen for capital gains with a voice thing) and this is taxable, albeit at a more favorable rate than regular income. Also, any dividends are taxable too. This means that you’re losing some of those profits to tax.

 Let’s say two different people invested in the exact same stock for their retirement. But one person invested inside of a TFSA and the other invested in just a normal cash account. By the time retirement rolled around each had profited exactly $500K. When the person in the TFSA sells their investment, they get the entire $500K profit, clean and simple. But when the person in the cash account sells their investment they only get about $400K in profit. That’s because in this scenario about $97K would be taken away for taxes. That’s 20% of the profits! Now obviously this example is very simplistic but it shows why investing in a tax sheltered account can make a huge difference. The awesome thing about the TFSA is that even when you take money out of the account there’s no tax implications, unlike the RRSP. So really with the TFSA you are done dealing with taxes. That’s what makes it such a simple account.

Since it is so versatile and doesn’t have the complexity of the RRSP, the TFSA can be used for everything from short term savings to long term investments. You can hold stocks, bonds, ETF’s, mutual funds, GIC’s and even high interest savings accounts inside of a TFSA. For short term savings like a down payment on a house, a common practice is to open a high interest savings account inside of a TFSA. This allows your money to be completely safe while earning tax free interest. For long term investments like retirement, a common practice is to hold a diversified mix of stocks and bonds - easily accomplished through an index fund which is something I’ll be covering a lot on this channel. So essentially, the versatility of the account makes it an excellent choice as a first investing account.

However only a certain amount of money can be held in a Tax Free Savings Account. There is contribution limit rules that dictate the amount of contribution room your account can have. In the video I break this down and you can also see the link below for more information.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html

Видео TFSA Explained: A Simple Guide to the Tax Free Savings Account канала Cash College