TFSA: The perfect emergency fund

By Gail Vaz-Oxlade on February 2, 2012
Estimated reading time: 2 minutes

Consider using your TFSA as a place to stash your money for any unpredictable events.

The best thing about a TFSA is its flexibility. You can take money out of your TFSA at any time for any purpose without losing the contribution room. This makes this account the number one choice for socking away an emergency fund. So even if you take money out in one year, you can put it back the next without affecting that year’s $5,000 contribution limit. Let’s say you socked away $7,500 in your TFSA so far. Your roof caves in, your car goes bump, your employer decides to chop back your hours through the dog days of summer, so now you’ve got a cash flow problem. Not with your emergency fund in your TFSA you don’t. You can pull as much or as little as you need to keep your budget balanced. Then next year, not only will you be able to put in the normal contribution, you can put back any or all of the money you took out to make ends meet. The TFSA is a great way for lower-income Canadians to set something extra aside for retirement without having to worry about how it’ll impact on their government benefits. Especially since neither the income earned nor withdrawals from a TFSA affect a person’s eligibility for federal income-tested benefits and credits. People saving to buy a home will also love the TFSA since there’s no specified repayment plan or tax hit if you miss a repayment, and you can reuse the contribution room for something else once you’ve accomplished your home-buying dream. Couples who want to income split will love the TFSA because a higher-income spouse can contribute to the TFSA of a lower-income or stay-at-home spouse, without the income earned being attributable to the higher-income spouse. The TFSA is also the perfect place to park that money you’re eventually going to use to buy a new car, repaint your house, or go on a splendid vacation… any kind of planned spending for a big ticket item. You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments. Why? Well since all the capital gains inside a TFSA is tax free, it also means any capital loss can’t be claimed to offset your other capital gains. The big thing to watch for is the fees levied by the FI’s offering the new TFSA. Don’t be so blinded by the tax-free income that you buy your account from some provider who then gouges you with admin and withdrawal fees. They’ll try. It’s up to you to make sure they don’t succeed on your back.