Sections Quoted from April 2022 Globe and Mail Article: 

TFSA 101: What to know about tax-free savings account limits, contribution limits and more

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"What is a TFSA in Canada?

A TFSA, or tax-free savings account, is an investment account and – as the name suggests – a tax shelter. A TFSA can hold cash, guaranteed investment certificates, mutual funds, index funds, exchange-traded funds or other investment products.

Unlike a registered retirement savings plan, which is also an investment account, the TFSA has no associated tax deduction, meaning contributing to it will not help you pay less in taxes right away. However, while RRSP withdrawals are taxable, money you take out of your TFSA is not subject to taxation.

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"What investments should I put in my TFSA?

The purpose of a TFSA is to avoid paying tax on investment income, says Investor Clinic columnist John Heinzl. Therefore, it makes sense to use your TFSA room for stocks, ETFs, mutual funds or fixed-income securities with higher yields so you can eliminate tax on the interest, dividends and capital gains. That said, Mr. Heinzl notes that if you have plenty of room in your TFSA, you can also keep low-yielding cash in the account.

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Laurie Bonten, senior investment adviser with Wellington-Altus Private Wealth in Winnipeg, agrees. “For most cases, the highest-growth investments, an example might be stocks, should be tax-sheltered,” she says.

However, while higher-yield investments are a good choice for a TFSA, that’s not the same as high-risk. A TFSA shouldn’t be used to hold the riskiest investments, says Jason Pereira, partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm in Toronto. Investments that he terms “speculative gambles” should instead be kept in non-registered accounts.

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For investors with a time horizon of at least five to 10 years, personal finance columnist Rob Carrick suggests using your TFSA to purchase a type of ETF called an asset allocation fund. “Think of these as a fully diversified portfolio in a box,” he says, “with variations for investors of all ages and risk profiles.”"

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"What are the pros and cons of a TFSA?

The biggest benefit of a TFSA is that you don’t pay tax on the investment earnings and withdrawals. This is in contrast to an RRSP, which is treated as taxable income when you remove money from your account, whether it’s in the near future or after retirement. TFSA withdrawals are tax-free.

Another benefit of TFSAs over RRSPs is that you are not required to take money out after age 71. This gives you more flexibility to decide how to use your savings. On a related note, any funds you withdraw from a TFSA will not affect other government benefits such as Old Age Security.

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A TFSA downside, however, is that there are no tax advantages at the time you make contributions. Which option is best for you depends on your annual income. Since the tax deductions linked to RRSP contributions are most beneficial for higher-income earners, Ted Rechtshaffen, chief executive officer of TriDelta Financial in Toronto, recommends that those who make less than $45,000 a year save in a TFSA first and those who make more than $85,000 prioritize the RRSP. (Of course, there’s nothing preventing you from maximizing contributions into both accounts.)

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Another thing to remember is that TFSAs are not designed to be used like a regular bank account. Any withdrawals you make cannot be replaced until the following calendar year, and penalties apply if you accidentally make an overcontribution. This means that if you want an account that you can move money in and out of frequently, you might be better off with a high-interest savings account.

In addition, the ease of making withdrawals from a TFSA might make it a less optimal savings vehicle for retirement, if you think you might be tempted to take the money out prematurely. RRSPs are more difficult to withdraw money from – plus, you will probably have to pay tax on those withdrawals. From a psychological point of view, this can make the funds in an RRSP feel more out of reach."

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End of quotations from Globe and Mail Article

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Helpful Links:

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• Who Can Open A TFSA

• TFSA Contribution Room 

• TFSA Limit Calculator - Globe and Mail Tool

• Withdrawals from a TFSA

• Successor Holder - The advantages of tax shelter transferal