Delay in Opening a TFSA a Very Costly Mistake!
16 May 2023 1
16 May 2023 1

Enriched Academy Staff

Almost everyone in Canada has heard of the Tax-Free Savings Account (TFSA), but if you already have a savings account or maybe you are younger and don’t have a lot of money, is there any reason to get one?

The short answer is yes — and the sooner the better!

You may believe a TFSA is something to start when you get older or mistakenly think that it is something for locking away long-term retirement savings. The fact is that TFSAs are actually quite flexible when it comes to deposits and withdrawals, they can save you a lot on your taxes, and you can use one to save for a house or a car, or yes, even your retirement.

What is a TFSA and how does it work?

A TFSA isn’t anything like your regular bank account. The main differences are that it is registered with the government and the money in the account doesn’t have to be held in cash. Registered accounts like the TFSA (and the RRSP) track the funds going in and out for tax purposes and although you can hold cash in them, you can also hold investments like stocks, mutual funds, ETFs and many others.

Although a TFSA is unlike your regular account and isn’t for daily banking, you can open a TFSA at most banks and credit unions as well as online brokerages. You have to be at least 18 years old to get one, but there is no fee and no minimum amount required to get started.

What are the benefits of a TFSA?

The main reason to get a TFSA as the name implies, is to save on your taxes. The catch is that if you don’t invest the money in your TFSA, you won’t be saving much. Simply putting money in your TFSA and then letting it sit there in cash won’t do anything for you. This is very different from an RRSP which delivers an immediate reduction in your income tax. However, down the road when you take money out of your RRSP you have to pay the tax, but you can take all the money you want out of your TFSA at anytime and pay absolutely no tax.

So, the secret is to make as much money as possible by investing with your TFSA because all that money will be tax free. If you buy a share of Google for $100 and sell it 5 years down the road for $500, you have $400 tax free profit in your jeans. If you bought those Google shares outside of your TFSA in a cash trading account, you would be on the hook for a pretty big chunk of tax — 50% of that $400 gain would be fully taxable!

How much should I contribute to my TFSA?

The best part of a TFSA is that everyone gets to put in the same amount regardless of how much money you earn and unlike an RRSP, you don’t need to be working and making an income to contribute. In 2023, you can put up to $6500 into your RRSP. But if you missed a couple of years and now suddenly find yourself flush with cash, you can use the carried over amounts from each year since you turned 18. In fact, if you are now 25 and have never had a TFSA, you can drop in over $45,000 since you have 7 years of contributions carried over.

What is the minimum I can put in my TFSA?

Chances are you won’t be able to max out your TFSA contributions, especially when you are young. Only 10% of Canadians of all ages actually max out their TFSA. However, this doesn’t mean that a TFSA is just for rich people. If you could only come up with $100 monthly for your TFSA from the time you were 18 until you retired at 65 and received historical average stock market returns of 7%, you would have $438,643. If you upped the monthly amount to $225 you would retire a millionaire!

Of course, 47 years is a long time and things will cost a lot more, but don’t underestimate the power of compounded investment returns. There are a number of self-directed investing options (like broad-based index funds or all-in-one ETFs) you can use to invest your TFSAs that don’t require a lot of time or investing knowledge to use. Of course, some funds will do better than others, but the real secret is to get started early! Unfortunately, only around 5% of TFSA are held by Canadians under 25.

How do I withdraw money from my TFSA?

If you don’t want to wait until your 65 to start spending those TFSA investment gains, you don’t have to. In fact, you can take as much money as you want out of your TFSA anytime you want. You won’t have to pay any tax and the only downside is that you may have to wait until the following year if you want to put that money back into your TFSA — you cannot re-contribute the amount of the withdrawal until the following calendar year, unless you have available contribution room. If you do overcontribute to your TFSA you need to correct the mistake as soon as possible as you are subject to a penalty tax of 1% per month on the excess amount until it is withdrawn. It's important to keep track of your contribution room to avoid over-contributing.

What are the disadvantages of a TFSA?

You may be thinking a TFSA is the greatest thing since sliced bread and for most Canadians, it is! However, there are situations where another registered account may be a more optimal choice. For example, if your income is high and you are in a high tax bracket, contributing to an RRSP may be a better choice if you don’t have the money to max out both. Another case may be if you are saving for a home, the new First Home Savings Account (FHSA) offers the advantages of a tax reduction like the RRSP and the tax-free investment growth of a TFSA and is a great choice if you are saving up for your first home.

One additional caveat to be aware of with a TFSA is that there are limits on how actively you can trade the investments held in the account. For example, day trading is not allowed, and it could cause the CRA to determine that the income in your TFSA is from carrying on a business and is taxable. Rules and tax interpretations for day trading with regard to TFSAs are different than for RRSPs and the CRA uses a number of factors to make a determination.


If you've already opened a TFSA and have investments sitting within your account, you're on the right track. Make sure the money is invested and confirm your annual return (net of fees) to ensure your investments are performing up to expectations.

If you haven't yet opened a TFSA, get out there and open one today! A few years from now you will be happy you did. If you're still somewhat confused, scared, excited, nervous, and looking for some support, we have a one-on-one coaching program that clients say is a financial game-changer. You can schedule a free financial assessment call HERE to get some feedback on how to improve your finances and the programs we have available, including one-on-one coaching.

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Jan 19, 2024 05:03:27

I recently opened a TFSA and plan to start putting more and more money in it. I believe it will pay off one day!