What is a TFSA?
TFSA stands for Tax-Free Savings Account. However, you’re best to ignore the last two words because they’re a little misleading (but I’ll talk about that another time).
The key words here are “tax-free.” And those are delicious words. Because in Canada, we pay an absurd amount of tax.
You see, any growth your investments or your savings earn in a regular account (or a non-registered account as it’s called) is fully taxable at whatever your top tax rate is.
For instance, if your top tax rate is 40%, then you have to give 40% of your growth to the government. So, if you earn $1,000, then $400 of it goes to the government and you’re left with $600.
However, if you held those same investments in a tax-free savings account, then you would pay zero tax on your growth, because it’s “tax-free.” You’d keep the full $1,000.
And as a financial advisor, I highly recommend you go for option two.
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