A tax-free savings account (TFSA) should be called a tax-free investment account. Why? Because the connotation with the words savings is that you can’t lose.
Within this particular replenishable investment vehicle, you can buy anything from a GIC to mutual funds to individual stocks, and everything in between. As long as they are Canadian stocks – all growth through capital gains, interest income, dividends are tax free upon withdrawal.
TFSAs are a great way to save, a great compliment to planning, and they work hand in hand with RRSPs – so what’s the difference between the two?
While both of them are considered registered accounts by CRA, the biggest difference is that with a TFSA, you can put money in and take money out without any tax being paid or withheld from the source when you redeem.
When you put money into an RRSP, you get a tax credit for your contributions, but that tax is deferred further down the line for retirement. The goal for an RRSP is to lower your taxable income, get the tax credit, and withdraw it as income later on. When you do so, you will be in a lower income tax bracket, so you will be in a lower tax bracket while in retirement, thus resulting in less tax being paid.
When it comes down to it, there’s a purpose for both TFSAs and RRSPs – seeking help from a professional advisor will help guide you towards what is best for you.
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