It's Your Money  

Shattering TFSA myths

Last week, the 2021 Tax Free Savings Account (TFSA) contribution limit was officially release at $6,000 – the same amount set in 2019 and 2020.

With the 2021 limit now confirmed, we know that the total contribution room available to someone who has never contributed before (and were 18 years or older in 2009 when the program was launched) is up to $75,500.

The annual TFSA dollar limit is indexed to inflation and rounded to the nearest $500.

2021 will be the 13th year of the TFSA program and yet there are still many Canadians who don’t understand how it works.

I quoted a study in one of my articles a few years back that suggested as many as 40% of Canadians did not know the difference between a Registered Retirement Savings Plan (RRSP) and a TFSA.

Looking at the various questions I’ve had in the past few years, I would have to guess that this number has not really changed. 

With that in mind, I thought it was time to discuss these great investment options again and dispel a few key myths.

The TFSA and the RRSP differ in two major ways:

  • An RRSP is funded with “pre-tax dollars” and the money is taxable when you pull it out.
  • A TFSA is funded with “after-tax dollars” and the money is tax free when you pull it out, including the amounts that are considered gains or growth. 

Both have an important place in retirement planning and often the best plan will incorporate both options. 

The real problem I keep seeing is that many individuals assume these five common myths are true:

  • A TFSA is a high-interest savings account – This myth could not be farther from the truth. While many providers push TFSA investments in these savings accounts that pay little to no interest, this is definitely not the only option. Stocks, bonds, mutual funds, ETFs, GICs and many other investment options are all available in the TFSA program. 
  • A TFSA is better than an RRSP – Many feel that the TFSA is simply better since you don’t have to pay taxes on the withdrawals you make, but they forget that you also don’t get a tax deduction for deposits like you do with an RRSP. Each situation is different, but most common best planning is to use a combination of RRSP and TFSA contributions.
  • A TFSA requires employment income – Unlike an RRSP, there is no employment income necessary to generate contribution room. Any Canadian over the age of 18 automatically gets the allowable contribution room for that year and you can carry forward any unused room to future years.
  • A TFSA will lose its contribution room – Again this is different from an RRSP (where the room is lost once used). If you put money into a TFSA and then pull it out, the amount you pull out is re-allocated to your contribution room the following Jan. 1.
  • A TFSA can be used like a bank account — We see far too many people put money in and out of a TFSA regularly throughout the year. While they never go over the contribution limit, their cumulative deposits in that year are well above the limit. As per above, you don’t regain room from withdrawals until the beginning of next year and using a TFSA like this can lead to hefty penalties.

When the TFSA program was first introduced, it did not have a significant impact on many people’s overall portfolio as the maximum room was only $5,000 per adult. 

As of Jan 1, a couple has up to $151,000 of combined room that they can utilize so it is important to understand how to properly do so.


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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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