Best Tips for TFSAs

James Schofield - May 25, 2023
Here are some tips to help you get the best out of your TFSA.

With the introduction of the Tax-Free Savings Account (TFSA) in 2009, Canadians have more options than ever before to help them save money and reduce taxes. Below are the Top 10 TFSA Tips you should know:

  1. Use your tax refund wisely. Use the tax refund from your RRSP contributions to invest in your TFSA for an optimal combination of growth and flexibility.
  2. If you have used up all of your RRSP contribution room and are looking for additional investments, ensure you use up all of your TFSA contribution room before investing in non-registered accounts.
  3. Resist the temptation to dip into your TFSA. The TFSA offers more flexibility than RRSPs, and therefore there are fewer barriers to discourage investors from raiding their TFSA if a short term cash need arises. Remember, the longer your investments sit uninterrupted, the more you benefit from the magic of compound growth. Discipline and a clear objective are essential when investing within a TFSA.
  4. Procrastination can be costly, so make your TFSA contribution early in the year. Similar to point #3, the sooner you put your money into a TFSA, the sooner you stand to benefit from the effects of tax-free compound growth. If you can’t do it all in January, monthly contributions can also be effective.
  5. Ideally, you should use your full allowable contribution room each year. But if you don’t, you will accumulate unused TFSA contribution room you can use later. When possible, and if it fits your financial strategy, strive to maximize your TFSA contributions.
  6. Investing in a TFSA during your accumulation years could help reduce claw-backs on income-tested benefits such as Old-Age Security and Age Credits when it comes time to withdraw retirement funds. Because returns on investment within a TFSA are non-taxable, they will not be included as part of your net income, potentially saving you money over time.
  7. Unlike RRSPs, there is no age limit on making contributions to a TFSA. In fact, you can contribute well into your retirement years, helping you save for short-term goals like that dream vacation, a new car or even home renovations. The income generated from investments in your TFSA is tax-free; therefore, it will not affect your federal income-tested benefits such as OAS or Age Credits.
  8. If you anticipate that your marginal tax rate will increase at a later date, you may benefit by saving through your TFSA rather than making additional RRSP contributions. While you’ll benefit from a tax deferral now, you’ll ultimately pay more tax on that income when your savings are withdrawn from the RRSP or RRIF later.
  9. Contribute to your spouse or common-law partner. You can contribute to a partner’s TFSA without affecting your contribution room. Income attribution rules which govern RRSPs do not apply. This can effectively double your family’s TFSA annual contributions if one partner cannot afford to make such an investment.
  10. If you are planning to leave your TFSA to your spouse, it is always best from an estate planning perspective to name your spouse as a successor holder, which will allow for the tax-exempt status of the TFSA to be passed on to your spouse. You will also avoid probate fees since these assets pass outside your estate and directly to your spouse.