Disclosure: We only recommend products we use or would use. All opinions expressed here are of our own. This post may contain affiliate links. Those affiliate links may allow the site to generate a small commission. That commission does NOT effect the price you pay for the product. Read our full privacy policy and affiliate disclosure.
Investment Disclaimer:
The information provided in this article is for educational and informational purposes only. It is not intended as financial advice, investment advice, or a recommendation for any particular security, strategy, or investment product.
Investing involves risk, including the potential loss of principal. Past performance is no guarantee of future results. Before making any investment decisions, it is crucial to conduct thorough research and seek advice from a qualified financial professional.
Readers are advised to carefully consider their financial goals, risk tolerance, and investment horizon before making any investment decisions. Diversification does not guarantee profit or protect against loss in declining markets.
The content of this article may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.
Always do your own due diligence and consult with a licensed financial advisor before making any investment decisions. The author and the platform on which this article is published are not responsible for any losses or damages that may result from reliance on the information provided herein.
Comparing TFSA and Savings Accounts: Which is Best for You?
Selecting the right environment where to store and earn your money is very important when it comes to the achievement of one’s financial goals. The two most popular accounts available in Canada are the Tax-Free Savings Account (TFSA) and the normal savings account. They both provide techniques on how to save money. However, there are a number of factors that distinguish them, and these determine how your money will compound over time.
In this article, we delve into the major differences between TFSAs and savings accounts so that you can decide which one is the most suitable choice for you.
What is Tax-Free Savings Account (TFSA)?
A TFSA is a registered investment account that was developed by the Canadian government in 2009. There is one major benefit, which is that any income or capital gains made within the account are levied zero taxes. This simply means that once you make withdrawal from your TFSA, the money withdrawn is not taxed, no matter the growth that has been made from the money saved.
- Contribution Limits
The TFSA is, however, subjected to an annual contribution limit, and in the year 2023, it was $6,500. Any unused contribution room is rolled over to the following years, and therefore, it might be possible that you have more room available if you have you have not been contributing to your TFSA account.
| Year | Contribution Limit |
| 2019 – 2012 | $5,000 |
| 2013 – 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 – 2018 | $5,500 |
| 2019 – 2022 | $6,000 |
| 2023 | $6,500 |
- Investment Flexibility
An investor is allowed to invest in any type of investment product available, including stocks, bonds, mutual funds, GICs, as well as cash inside a TFSA.
- Withdrawal Flexibility
Money in the TFSAs can be withdrawn, and it is possible to contribute the same amount the next year; hence, there is flexibility for those who must use the money accumulated in the TFSAs.
What is a Savings account?
A regular savings account is an account that is provided by banks and other financial institutions where you can deposit your money and get an interest on it. These are secure and can be accessed easily, and are more liquid than other types of accounts, which can be used for short-term savings or for an emergency.
Interest Rates
The interest rates on savings accounts are usually quite low, and this varies depending on the type of account and the financial institution. Interest earned is treated as a type of income which is charged to tax.
Liquidity
Savings accounts are very flexible, and you can have access to your funds at any time. Hence, they are suitable for any form of emergency, expense, or short-term financial goals.
Fees and Limitations
Some savings accounts might have a specific fee for transactions or withdrawals, while others might require a certain balance to be maintained to avoid charges.
Main Differences Between TFSAs and Savings Accounts
- Tax Treatment
- TFSA
All income that is received within a TFSA is not taxed. You don’t pay taxes on withdrawals or gains, even if you have had a high return on investment in a particular period.
- Savings Account
Interest earned in a regular savings account is considered as part of the total income that is taxable. The higher the interest you earn, the higher the tax you will pay when you file your tax return.
- Contribution Limits
- TFSA
TFSAs, like other saving schemes, have prescribed contribution limits per year. The limit for 2023 was $6,500, but any unused room is carried forward.
- Savings Account
There are no contribution limits on savings accounts. You can deposit any amount of money you wish.
- Investment Options
- TFSA
TFSAs enable holders to invest in stocks, bonds, ETFs, and GICs. This makes them ideal for long-term investment as it is possible to invest in other high-return earning assets.
- Savings Account
A typical savings account usually provides interest on cash balances only. While there are some high-interest savings accounts (HISAs) that may have better rates, they are still not as high as the possible returns from investment on a TFSA.
- Accessibility and Liquidity
- TFSA
TFSAs are relatively easy to access, and one can withdraw money at any time without incurring penalties. However, re-contributing during the same year may be disadvantageous, leading to penalties if one contributes beyond the allowed limit of his or her contribution space.
- Savings Account
Savings accounts provide the highest level of liquidity since the money can be accessed instantly. This makes them ideal for use where the money needs to be easily accessed, such as for emergency funds or expenses.
Which is Best for You: TFSA or a Savings Account?
The right choice between a TFSA and a savings account depends on the goals, financial objectives, and the timeline one has in mind. Consider the following factors:
- Short-term goals
If you require frequent or instant access to your money or if you are saving for a goal that will be achieved in less than five years, then a regular savings account may be the most suitable one for you. It also has high liquidity, which allows you to withdraw your money at any moment in time.
- Long-term Growth
If you are saving for retirement or any other long term goal and you do not expect to use the money in the near future a TFSA account is more suitable. The tax-free growth of your investments can lead to a large amount of savings in the long run if you invest in high-yield instruments like stocks or bonds.
- Tax considerations
If you want to avoid taxes on your savings, then the TFSA’s tax-free feature offers the best tax benefit. A savings account will provide income that is taxable on the interests earned, which results in a reduction in your overall returns.
The Bottom Line
While both TFSAs and savings accounts are useful in your financial plan, they are both designed for different purposes. For short-term and highly liquid savings, a traditional savings account is the most appropriate. However, if you are thinking about long-term growth and wish to get high returns on your investment without paying taxes, then the TFSA account has a lot to offer.
Finally, you don’t have to limit yourself to one of the above options. Some Canadians will have a TFSA and a savings account to achieve flexibility for short-term spending and tax-free growth in the future. That way you will be in a position to understand how each one of them works and hence be in a position to make informed decisions about where to save your money to best achieve your financial objectives.