Tax Free Savings Accounts Pros and Cons

The TFSA, or tax free savings account, was made available for citizens of Canada in the year 2009. Any Canadian citizen who is at least 18 years of age can open one of these accounts. There are tax free savings accounts pros and cons. For example, some good things about this type of account is that the income accrued from the account is free from tax, and the account can be used without penalty whenever the account holder wishes. Of course nothing is perfect, including a TFSA. If you are a Canadian citizen who is considering this type of savings account it is wise to weigh both the advantages and disadvantages before making a decision.

The clear benefit to this type of account is that it is tax free. The funds you put into your account accrue interest, which is not taxed. This means you get all the interest without having to pay taxes on it. And, these accounts are flexible. Many types of financial accounts have penalties for a certain number of withdrawals or a low balance. The tax free savings account does not. You can take your money out any time you choose with no penalties. The only downside to taking money out is that you won’t be earning as much interest.

Also, the limits on contribution carry forward from year to year. A tax free savings account has a yearly contribution limit of $5,000. An example of the carry over might be if the account holder put in $5,000 during the first year but contributed nothing for the second year. The account can still have up to $15,000 deposited into it during year three. However, speaking of limits, this can also be looked at as a disadvantage. Because you can only put in $5,000 the amount of interest you can earn is also limited.

Another thing you might not like about a TFSA is that they are individual accounts. This means only one person can be an account holder and only one person can contribute to the account. In addition, beneficiaries cannot be named to the account. The account holder is the sole individual who can access the account. In addition to this disadvantage, there may be delays when an account is first opened. The account holder may have to wait before being able to use their account, unlike other types of financial accounts which can be accessed immediately. As you can see, there are tax free savings accounts pros and cons which you should weigh before deciding if this is the right type of savings account for you.

Comments are closed.