Why your TFSA should be your secret financial weapon

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When it comes to saving your hard-earned cash, having the right tools in your back pocket can make a big difference. There are lots of ways to save, but a TFSA—aka a Tax Free Savings Account—might just be the secret financial weapon you’ve been looking for.

While it’s often mistaken for a basic savings account, a TFSA is actually a type of registered savings plan.  Each year, if you’re a Canadian 18* years of age or older, you can contribute to a TFSA. The amount you can contribute is determined by the government (this year’s limit is $5,500). At its most basic level, that’s pretty much the gist of it. But to take it a bit further, TFSAs are incredibly versatile and offer a lot of other benefits:

Your money grows tax free. While this one might seem like we’re stating the obvious, the tax-free part of your part of your TFSA is a really big advantage—but probably not in the way that you think. Unlike other types of registered savings plans, you don’t get a tax deduction for putting money into your TFSA. However, the investments inside the plan can earn returns without those returns being taxed, which can you help build your savings faster. And the best part? Outside of a few exceptions, even after you withdraw your savings from your TFSA, you’re still not taxed on the money you made, making the plan a smart way to invest.

You don’t need to have a traditional income to use it. Your contribution room inside of your TFSA is not determined by how much income you make (or don’t make) on paper. This can make TFSAs a great option for students, seniors, or self-employed individuals.   

If you don’t use it, you won’t lose it.  $5,500 can be a daunting or unrealistic chunk of change to set aside in a year. The good news is, if you don’t use all of your available contribution room each year, your unused room will carry forward each year. This means you can grow your savings tax-free as your income increases.

You won’t be dinged when it comes time to withdraw. One of the great things about a TFSA is you can withdraw your money anytime without worrying about paying taxes on your original contribution or the returns you’ve earned inside the plan. And if you’re guilty of dipping into your savings on a regular basis, getting money out isn’t as simple as hitting the ATM. Having that little buffer can mean you have a built-in way to be less impulsive when it comes to your cash.

It’s a flexible way to save. While you can certainly use your TFSA to help save for long-term goals like retirement, they’re actually well suited for shorter-term savings goals like buying a car, saving up for a down payment on a house, or even going on a big trip.

* Some provinces require you to be 19 years of age to open a TFSA; however, contribution room still begins to accumulate once you turn 18.