Do you know what TFSA stands for? ‘Tax Free Saving Account’ you say? you got it!
But do you know what that means exactly? well most people think they know, when in fact they don’t.
Why? the simple inclusion of the letter ‘S’ or the word ‘Savings’ throws people off. People assume and treat TFSAs as a saving account and nothing else. The fact of the matter is, a TFSA can be used in a number of ways to generate, save or invest your money. For example, any of the following would be technically correct:
TFTA: Tax Free Trading Account
TFIA: Tax Free Investment Account
TFSA: Tax Free Saving Account
TFGA: Tax Free Growth Account
TFA: Tax Free Account
As you can see, you can do all of the above with a TFSA account, be it to grow, save, invest, trade or simply use it as a bank account to deposit and spend your money though this wouldn’t be the best way to use it! The only limitation of a TFSA is that it has an annual limit (for this year it is back to $5,500, after rising to $10,000 for 2015) as well as the fact that any money you gain within a TFSA is not taxable. Of course, there is more things to know about TFSAs, but that is beyond the scope or purpose of this article. The point is, the words ‘Tax Free’ is all that matters in a TFSA. Which is why the word ‘Saving’ in TFSA confuses a lot of people. They think TFSAs are for saving only. While they can certainly be used for that, it is one of number of things we can use TFSAs for.
Trading and Investing
So many people are not aware of this but you can use a TFSA account to trade and invest in stocks, bonds, ETFs etc. In fact, it is one great way to generate money and not have to give anything back to the government in the form of taxes. Let me explain with an example. Let us assume you are a couple and together, through 2016, have a combined lifetime contribution room of $93,000. Let us further assume that you have accumulated $90,000 in TFSA. You can basically use that $90K to trade and invest and not have to pay tax on the money generated from stock appreciation or any capital gains. Let me use another more specific example. Let us say you use your $90K to buy 3 different stocks, which yield an average of 4.5% in dividends. For the entire year, you will get well over $4,000 in dividend income alone. Thanks to this being done within a TFSA, you won’t have to pay any taxes on this $4,000 that you earned in dividends. If this was a regular account, you would have to pay taxes on this $4,000 in dividends.
The other problem people have, once they are aware of the fact you can use it for trading and investing, is how to do that? Most discount brokers and trading firms allow you to open a TFSA account and trade within it. For example, with RBC Direct Investing-the platform I use-when you open an account, you will have the choice of opening a regular account, TFSA, RRSP etc. In fact, I don’t know why anyone would not use a TFSA account to trade and invest, assuming you have the room to contribute. Using a TFSA for saving purposes should be secondary, unless you don’t like to take any risks and don’t know anything about investing and trading.
So go ahead and make use of your TFSA if you never had before. It will not only save you in taxes, it will allow you to make money.