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How to start investing in a TFSA

Your guide to the popular, but misunderstood, savings account.

The 411 dishes, well, the 411 on a personal finance topic you need to know by cutting through the jargon and empowering you to take control of your finances. Have a topic you want us to tackle? Let us know!

In between soothing clips of Emily Mariko putting together a delicious meal and productive 5-to-9 routines, I've come across TikToks about the misconceptions around tax-free savings accounts (TFSAs), or registered accounts that help you make money, sans tax. The biggest misconception is that a TFSA is just a savings account (even though that's what its name suggests 🙃): You can hold investments in a TFSA, and withdraw the interest and dividends you earn from these investments at any time.

Bamboozled? You aren't alone. To set the record straight on TFSAs, Btchcoin spoke to Lisa Hannam, the executive editor of MoneySense.ca. (This interview has been edited for length and clarity.)

Okay, so you can invest through your TFSA?!  You can hold cash, guaranteed investment certificates (GICs), stocks, bonds, exchange-traded funds (ETFs) and / or mutual funds in a TFSA. Each has its own risk tolerance, from GICs with their promised returns to ETFs which can follow particular stock exchanges if you choose. Stocks tend to be more volatile, and bonds respond to interest rates. So, you would need to consider how able you are to deal with fluctuations. (A certified financial planner would be able to help advise.)

What are some pros of a TFSA? TFSAs offer non-taxable growth—you are not taxed on any money you earn with this registered account. It’s good for both long- and short-term savings goals since withdrawals aren’t taxed. It’s flexible in that you can manage how and when you contribute as well as make withdrawals. If you want to put money into it weekly, you can. If you want to put away larger amounts of money, like from a work bonus or a tax refund, you can.

  • Also, you can re-contribute any withdrawals, too. It’s great for young people whose income wouldn’t benefit greatly from the tax savings of an RRSP. If you have years when you weren’t able to contribute or didn’t reach your limit, those amounts can roll over, which is great.

What are the cons of a TFSA? The tax savings aren’t immediate. So, you won’t pay less taxes when you contribute to a TFSA like you would with, say, an RRSP. If you over contribute, then you will have to pay a penalty of 1% of what you over contributed for every month that money is in your account—there is no grace period.

  • Also, unlike an RRSP, how much you contribute is not based on income, meaning as you increase your income, your TFSA contribution room doesn’t increase. There is no joint TFSA or spousal TFSA. So, it’s a savings tool for individuals only. Your money isn’t guaranteed for growth, as inflation and the risks of investments are still at play.

What should someone who is investing in a TFSA for the first time consider?

  • Do I only want to earn interest on my savings, or do I want more growth? I think the obvious answer is yes for many, so consider making your TFSA an investment account in which you want to hold equities, especially those that pay dividends or interest.

  • When will I need access to money from my TFSA? This will help you determine if you have long- or short-term goals. The sooner you want that money, the lower the risk you will want to take. The more time you have, the more likely you are willing to ride out the fluctuations and see longer growth returns.

  • What is my TFSA limit? Your age, how much you’ve already put into a TFSA and previous withdrawals will help you determine how much money you can put into your TFSA and ultimately what investments you can buy within the account. (Find out how much you can put in your TFSA using this calculator.)

  • What are the fees for my TFSA? Since the point of a TFSA is to have non-taxable growth, you don’t want a “silent tax” of fees. Ask about the fees when comparing providers for TFSAs, as well as the fees on the equities, too. The good news, though, is that there are strategic ways to pay certain fees.

If I'm new to investing, should I invest in a TFSA through a bank or an online brokerage?

It’s not so much about using a bank or an online brokerage for beginners, but how much assistance you want with your TFSA. It’s worth being honest with yourself about how involved you plan to be in managing your account and how much handholding you think you may need. If you want something that’s hands-off for you, then working with a professional, at a bank or at a firm, would be best. If you want to be very involved, then you want a TFSA with equities that you can manage yourself. Both banks and online brokers allow you to do that. Also, the big banks with investing arms allow you to manage your TFSA investments online.

How do I decide between an RRSP and TFSA?

You have the option of using either a TFSA or RRSP (or both), but look at what makes sense for your income tax bracket. If your income is low enough that putting your money into an RRSP won’t make a significant impact on tax savings, then a TFSA could make more sense over the long term, since you are not taxed on the growth of the account. An RRSP will tax the growth, but that is delayed until you withdraw during retirement when your income will be lower.

The bottom line: Sorting out your investment strategy is probably the last thing on your mind as inflation erodes the value of your hard-earned cash — a recent survey by Angus Reid found that 19% of Canadians are either deferring or pausing investing in their RRSPs and TFSAs. But don't discount the math ✨magic✨ of compound interest.

Of course, as with any financial decision, make sure to chat with an advisor that can assess your personal situation and goals.