6 TFSA facts worth knowing

1. Can you hold any type of investment in a TFSA?

From our earliest days, a “savings account” was where money went when it came out of the piggy bank. The name suggests deposits, safety and low rates. But almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into your TFSA. This includes bonds, stocks, mutual funds, etc. 

Maybe the name is causing confusion? Many banks and financial institutions advertise a set percentage for their cash TFSAs and it’s very low. The TFSA is a savings shelter similar to an RRSP, and you need to choose the investment that goes within it.

2. Can you have more than one TFSA? 

You’re not limited to how many TFSAs you can have. In fact, you can have as many TFSAs as you’d like. But there’s a limit to the total amount you can contribute to your TFSAs. Whether you have one or multiple accounts, the annual TFSA limit (or the total contribution room) is per person, not account.

Are there concerns with having multiple TFSAs? There really isn’t a big risk to holding multiple TFSAs. But there are two things to consider:

1. Risk of over-contributing. The biggest concern is not keeping track and possibly over-contributing. Over-contributions to TFSAs are subject to a 1% penalty tax per month (only on the over-contribution amount). So, if you open more than one TFSA, make sure you have a way to track your contributions. 

• If you do over-contribute, don’t worry too much. You can fix it. 

2. Possibly paying more in fees. If you have multiple managed accounts that charge fees, then consolidating your accounts in one place may be wise.

3. Are TFSA contributions deductible on your tax return?

Unlike an RRSP, contributions to a TFSA are not deductible for income tax purposes. Since you contribute after-tax money to a TFSA there’s no tax on the amount invested or any growth when you withdraw it.

4. Can you use a TFSA as an emergency fund?

You can use a TFSA for your existing savings, even if they’re relatively modest. You can access the money at any time, if you don’t lock the funds into a non-redeemable investment. This also makes a TFSA perfect to use as an emergency fund to help you get through unexpected events (like a global pandemic). You’ll have the security of knowing the money will be available if you need it.

5. Can you use a TFSA for income splitting?

You can use your TFSA as an income-splitting tool to lower your family’s overall tax bill. It works when the higher-income spouse gives money to a lower-income spouse to contribute to their TFSA. The higher-income spouse doesn’t get a tax deduction, like they would with a spousal RRSP, for example. Still, the benefit is the interest earned on the money invested in a TFSA isn’t taxed. There are potential negative tax implications when attempting such a maneuver using non-registered investments. Talk to an advisor about what might make sense for you.