What is a TFSA?
A Tax-Free Savings Account is not a savings account, it is a tax wrapper. Inside a TFSA, dividends, interest, and capital gains are never taxed, and withdrawals do not count as income. CRA sets a new contribution limit each year ($7,000 for 2024). If you have been eligible since 2009 and never contributed, your cumulative room is roughly $95,000. Withdrawals are added back to your room the following calendar year, not the same year. You can hold cash, GICs, ETFs, stocks, mutual funds, and bonds inside it.
Say you contribute $7,000 a year into XEQT (a globally diversified equity ETF) inside your TFSA from age 25 to 65. Assume an 8% long-run return in CAD. You contribute $280,000 of your own money. The TFSA balance ends near $1.96 million, every dollar withdrawable tax-free. The same $7,000 a year in a non-registered account, after 25% on dividends and eventual capital gains, ends closer to $1.4 million net.
Holding a high-interest savings account inside your TFSA while keeping equity ETFs in a non-registered account. You are wasting the most valuable tax shelter in Canada on 4% interest. Equity goes inside the TFSA, cash goes outside.
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