TFSAs are continuing to grow in popularity. The latest statistics from the Canada Revenue Agency (CRA) show there were more than 11.7 million TFSA holders in 2014—a 143% increase from 2009, the year they were introduced.
The TFSA is also much more flexible than its older cousin, the RRSP. TFSA withdrawals are tax-free and they can be used for either short-term or long-term savings goals.
Like an RRSP, a TFSA is a tax-sheltered account. That means you don’t have to pay taxes on interest, capital gains, or dividends. Not having to pay tax can lead to additional savings in the future.
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Let’s use the following example: You’re 30, you live in Ontario, and you contribute $5,500 a year (which also happens to be the current TFSA contribution limit) for 15 years.
If you don’t make any withdrawals over the 15-year period, the annual return is 4%, and your highest marginal tax rate is 29.65%, you’ll have $114,534 in a TFSA compared to $103,750 in a taxable or non-registered account. That’s a $10,784 difference because you don’t have to pay tax on the investment income earned in a TFSA.
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