Pros & Cons of Tax Free Savings Accounts

In 2009, tax free savings accounts, or TFSAs, became available to Canadian citizens. Anyone aged 18 or older has the ability to open a TFSA, which can be used for any reason and accessed at any time without penalty. While a TFSA offers certain benefits to any individual looking to net some tax free income, there are also some potential drawbacks to consider as well before making the decision to open an account.

Perhaps the biggest advantage of a TFSA is the most obvious, and the one found in the name of the account type--the ability to earn money in a tax free manner. The money contributed to the TFSA earns interest, and this interest is not taxed in any form, allowing the account holder access to 100 percent of the money.

Unlike a registered retirement savings account, a TFSA allows the account holder to withdraw money at any time without penalties aside from the fact that the account will earn less interest as a result. This allows TFSA owners the flexibility to withdraw money should a situation come up where extra finances are needed.

Although TFSAs do not allow an owner to contribute more than $5,000 per year, that limit adds up over time regardless of whether or not any money was contributed. For instance, an account that received a maximum contribution of $5,000 in the first year but no money in the second year is still eligible to hold as much as $15,000 in the third year.

Unlike other savings accounts or retirement funds, a TFSA has an annual contribution limit of $5,000. This means that even though the interest earned is tax free, it will take several years to generate as much interest as other account types simply because of the limit on funds from which to draw interest.

TFSAs are single-owner accounts, and as such, only the person named as the account owner is able to make tax free contributions. As of July 2010, there is no way to add a beneficiary to the account, so only the account holder has access to the TFSA.

In some cases, problems with delays have occurred, forcing a potential TFSA owner to wait longer than expected for the account to become active. This problem does not usually exist for other account types.