The TFSA is probably the most under-utilized investment tool that I have ever come across.  The trouble with these accounts is that they are called "savings accounts".  Really they should be called "investment accounts".  Ninety nine percent of the people I sit down with think that they should put their saving in a TFSA and earn whatever the bank decides to pay as interest, when really the most aggressive investment positions should be going into these accounts.

The TFSA operated pretty much in the same manner as an RRSP except that it doesn’t have the tax break attached to it.  So you contribute to a TFSA with after tax dollars.  You contribute to an RRSP with before tax dollars and these dollars become exempt from taxation.

For the duration of time that your money is invested in the TFSA or the RRSP, there is no tax to pay for any growth, dividends received or interest income.

The big difference is that when you take an income from your RRSP, both the principal that you originally invested plus all the growth in this investment is taxed at your rate of personal income tax.  Essentially the RRSP is a tax deferral vehicle.  On the other hand, you can take both your original investment as well as the growth on this investment out of the TFSA and never pay any tax!  I call this brilliant! Everyone should have one and use it to the max.  Meaning that those investments that have the potential of earning the highest amount of money should be invested in the TFSA, so that all the earning remains tax free forever!

Instead I find people using the TFSA in pretty much the same manner that they would use any other savings account.  Most accounts accumulate cash and make no real return – so where is the saving on taxes?  You have to have tax to pay in order to save it!

In addition, I find people putting in and taking out money from a TFSA really foolishly.  I say this because, you cannot take money out of a TFSA and put it back in during the same tax year, as it counts as a contribution, and cumulative contributions are capped starting at $5000 in 2009 and $5000 in each subsequent year.  The contribution limit is not linked to your income, therefore each Canadian resident can contribute to the max or carry unused room forward for an unlimited period.

Of course, banks don’t really have the time or the inclination to educate their clients about the opportunities they are missing out on – in fact, bank gain from their lack of knowledge.  The TFSA is a great mechanism for the banks to borrow money at low interest rates from the general public and then lend it out in the form of lending products such as mortgages – ever wonder why the bank call a mortgage an asset?

The TFSA can be an extremely powerful weapon in your retirement arsenal – find out how – talk to an advisor, attend a seminar, read a book, find out how.

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