What exactly is a TFSA? A Tax-Free Savings Account (TFSA) isn’t a strict savings account – it’s a type of investment account.
The misleading name doesn’t explain how the account operates, so let’s outline the key details.
- Anyone 18 or older in Canada can open a TFSA.
- Any contributions or earnings in a TFSA aren’t taxable. This includes any amounts withdrawn from the account.
- TFSA contribution room is limited both annually and during your lifetime. Check your Canada Revenue Agency (CRA) account for exact details on your contribution room.
- The total TFSA contribution room starts when you turn 18, so you won’t have the same contribution room as someone who turned 18 in 2009 (when the TFSA was first introduced).
The four points listed above provide pivotal information to understanding the core rules and restrictions of the account. With the TFSA rules laid out, let’s focus on how to open a TFSA.
How to Open a TFSA
All major banks, credit unions, and investment platforms provide options for a TFSA. There are variations of a TFSAs offered, but you will want to open a self-directed TFSA.
You can open several self-directed TFSAs. For example, I opened one through my bank and opened another through an online investment platform. Contribution limits still apply regardless of how many TFSAs you open.
Most institutions allow you to open a TFSA online after completing a questionnaire. If you need help, go to your local bank for assistance or ask a family member.
How to Use Your TFSA for Investing
Congratulations! You opened a TFSA and can now take advantage of Canada’s best savings and investment account.
Once you transfer money into your TFSA, the money doesn’t magically grow on its own. You must invest the money into something.
A self-directed TFSA lets you choose your own investments (like ETFs or securities) instead of relying on your bank’s mutual funds.
Historically banks would open a TFSA for you and offer to purchase mutual funds on your behalf. Mutual funds pool money into an investment fund from other investors (people like you) to buy securities (stocks on the stock market). This works because people with more experience try to make more money with your money. Mutual funds are convenient but come with a fee.
Best TFSA Investments for Beginners
Instead of opting for mutual funds and paying a consistent fee, invest in lower risk options like ETFs (Exchange-traded funds) or a HISA fund (High Interest Savings Account). Most banks in Canada offer their own ETF options for lower fees. They often outline risk levels, management fees, and a description of the ETF.
If ETFs seem daunting, purchase a HISA fund (literally search HISA from your investment application). It’s a very low risk investment with a very low return. While you learn and become more comfortable in the stock market, your money will grow. It’s a great option for short-term investment as well.
You are now well situated to start your savings and investment journey. Do your research before buying anything new or consult my investment guide (coming soon) for more information.
Money Method Tip: Start small. You can automate your weekly TFSA contributions — even $25 a week adds up faster than you think.
