What is a Tax-Free Savings Account? - A tax-advantaged account provided by the Canadian government - One can pick what to put in this basket, items include exchange-traded funds, guaranteed investment certificates, stocks, bonds and yes, actual savings accounts - The best part is that whatever gains you make from the investments in that basket you pay no taxes - This means you pay $0 in capital gains tax for decades of compound interest.
Let's take a look at an example: If you invest $1000 when you are 18 at an average return of 8% (which is the average return of the stock market) your investment will compound to $37,000 when you turn 65 years old. When you withdraw the $37,000 you will pay $0 in Capital Gains Tax for the $36,000 gain your money has earned you. This is the advantage of a TFSA, unlike the RRSP where you would have to pay Capital Gains Tax
Other Advantages of a TFSA: - Great when you are young because of two reasons: 1. You have the power of compound interest. 2. When you are young you most likely are not earning a lot so you are paying less in taxes which is like a win-win so this is perfect for people aged between 18-30 who have not reached their potential income - You can withdraw money whenever you want for a TFSA without penalty. So say few years down the road you need the initial $1000 you deposited, you can take it out (and once again, tax-free)
How do you become a millionaire using a TFSA? If you invest $15 a day or $5,475 a year, starting from age 18 all the way up until the age 53 if you consistently invest $15 a day with an average annual return of 8% you will have a whopping $1,018,909.26. If you continue to invest $15 a day for 12 more years all the way until you are 65 years old you will have an even fatter $2,677,998.60! If you use the 4% rule in retirement every year and have a modest interest rate that is adjusted for inflation you can spend about $100,000 annually in your retirement which is crazy!
Notes for becoming a millionaire $2,677,998.60 ACCOUNT BALANCE - $257,325 YOU CONTRIBUTED == $2,420,673.60 PROFIT. If you average this out to the 47 years you pretty much earned $51,503.69 passively TAX-FREE. This is literally without doing anything other than being financially smart, living frugally, and being disciplined enough to contribute to your TFSA. In fact, that $51,000 is much larger than the average Canadian income.