At first, I was confused about the difference between TFSA and a savings account. After more than two years of holding TFSA accounts, TFSA can often be more beneficial over a savings account when used correctly.
TFSA has more flexibility since you can hold stocks, ETFs, mutual funds, and other investments, while savings accounts can only hold cash. As such, a savings account is more stable as it earns constant but low interest, whereas you can lose money in a TFSA or earn higher returns depending on your investment.
TFSA (Tax Free Savings Account) may sound complicated at first, but understanding TFSA is simpler than you think.
Which is better: TFSA or a Savings Account?
TFSA is generally better than a savings account since income on a TFSA is tax free whereas interest income on a savings account is taxable. However, TFSA have a maximum deposit limit while there is no limit on deposits to a savings account.
In addition, TFSA can also be used as a regular savings account. Interest income on a TFSA Savings Account is tax free and lower than other kinds of investments.
TFSA has a contribution limit of around $6,000 per year. Unused contributions from previous years are carried forward. (Source)
TFSA vs Savings Account
| TFSA | Savings Account |
| Potential gain or loss of investment | Constant lower interest income |
| Profits are Tax Free | Income are taxable |
| More Investment options (Stocks, Bonds, etc.) | Cash only |
| Funds can be withdrawn anytime tax free | Funds can be withdrawn anytime |
| Deposit limited up to TFSA contribution limit | No limit on deposit amount |
Stocks such as Tesla and Apple can be held in a TFSA account. These stocks can potentially gain or lose 30% or more in several months to a year. Should these be held in a TFSA, investment gains will be tax free. At the same time, losses are not tax deductible.
On the other hand, stocks held on a regular account are taxable and losses can potentially be tax deductible.
Cash on both TFSA and a savings account can be withdrawn anytime. TFSA investments have to be converted to cash before withdrawal. Stocks and ETFs inside a TFSA can easily be converted to cash in a couple of days.
How to Make Money on TFSA and Savings Account
You can make money on a TFSA when your chosen investments appreciate in value. At the same time, you can lose money in a TFSA when your investments drop in value. Speculative stocks generally offer higher potential returns and a higher downside. TFSA Savings Account is more stable and acts similar to a savings account.
Possible Investments in a TFSA include:
- Stocks (Mostly US and Canadian stocks)
- Bonds
- ETFs (Exchange Traded Funds)
- Mutual Funds
- Cash
These are the most common investments in a TFSA. Many other investments are also possible in a TFSA.
Savings Accounts
Cash is the only asset in a savings account. Interest income is usually paid every month. The current rates of most savings accounts in Canada are between 0% to 2% (stated in rates per year).
My experience with Savings Accounts
Savings accounts are straightforward and simple. Like many people, I have a savings account since I was a teenager. A small amount of interest is paid every month. I generally still use savings accounts to hold most of the cash in my portfolio when waiting for an investment opportunity.
My experience with TFSA Accounts
I have been currently holding TFSA accounts with both Wealthsimple Trade and Questrade for more than 2 years. I hold mostly US and Canadian stocks in my TFSA accounts. The account value of my TFSA constantly increase or decrease in value each day.
I guess my tip is to start small since TFSA accounts do not have minimum requirements. I started with just around $300 and added more over time.
Stocks can be risky. With a small account, the worst case scenario is to lose a couple hundred bucks. When starting, it may be best to only invest in stocks the money that you do not need for essential stuff.
Also, ETFs are a great way to diversify rather than buying individual stocks. For example, ETFs such as SPY and VOO reflect the returns of the S&P 500. The S&P 500 is made up of stocks of the 500 largest companies in the United States, which includes Apple stock, Amazon stock, Tesla stock, and more.
Dividend stocks are also an option. It may be best to start with well known stocks such as Walmart stock, McDonald’s stock, A&W stock or a company where you buy something for yourself.
3 Main Kinds of TFSA Accounts
- Self-directed TFSA – Individual stocks, ETFs, etc. of your choice
- Managed TFSA Account – Pay a yearly managed fee so a robo-advisor or a fund will manage your investments
- TFSA Savings Account – Similar to a regular savings account
Self-directed TFSA
These are TFSA accounts where you can buy or sell stocks, ETFs, mutual funds or bonds whenever you want. You can invest in most stocks in Canada and the United States for a trading fee of about $10 per trade on most platforms.
Investing in European or Asian stocks in a self-directed TFSA is possible, depending on the platform, but commission fees are usually much higher on stocks outside the US and Canada.
An example of self-directed accounts in Canada are Wealthsimple Trade TFSA and Questrade TFSA. Stocks and ETFs can be invested on Wealthsimple and Questrade TFSA accounts in Canada.
Article about How to Invest in Stocks in a TFSA: How Start Investing in Stocks in Canada (with as little as $100)
Also, here are video tutorials on how to actually buy and sell stocks on TFSA accounts with either Wealthsimple Trade and Questrade.
How to Buy and Sell Stocks on Wealthsimple Trade
How to Buy and Sell Stocks with Questrade
Managed TFSA Accounts
Managed TFSA account is where funds are automatically managed when you add cash. Managed TFSA accounts typically have yearly management fees of around 2% or more. Also, there are typically a set of questions that will be asked to determine the amount of risk you are willing to take.
Different investments will be automatically investment depending on the amount of risk you are willing to take.
TFSA Savings Accounts
TFSA Savings Accounts earn a constant small amount of interest. Interest income on a TFSA savings account is tax free. However, deposits to a TFSA savings account are limited up to your TFSA Contribution Limit, which will be discussed below.
The TFSA contribution limit applies to the total of deposits on all of your TFSA accounts.
Disadvantages of a TFSA
- Potential loss of investment value
- Amount of deposits limited up to your TFSA contribution limit
- Must be a resident of Canada and at least 18 years old
TFSA Contribution Limit
| Year | Contribution Limit |
| 2022 | $6,000 |
| 2021 | $6,000 |
| 2020 | $6,000 |
| 2019 | $6,000 |
| 2018 | $5,500 |
| 2017 | $5,500 |
| … | … |
| 2009 | $5,000 |
- Unused contribution limits for past years do not expire.
- Withdrawals are added to the contribution limit every January 1.
- Multiple TFSA accounts can be opened, but the total deposits should be below the contribution limit.
- The value of investments in TFSA does not affect the contribution limit.
Can I use a TFSA as a savings account?
TFSA can be used as a savings account through a TFSA savings account. A TFSA Savings Account is simply a savings account where interest income is tax free. However, TFSA savings accounts have a maximum contribution limit of around $6,000 per year.
Also, funds can be withdrawn anytime on these accounts.