Why Tax Free Savings Account are a Bad Idea: Part 1

In our last three tips we have discussed why Tax Free Savings Accounts are a good idea:

  1. you can save taxes;
  2. it’s harder to get at your money, so you are more likely to not be tempted to dip into your savings; and
  3. future income from your TFSA will not impact your eligibility to receive some government programs.

However, there are also two reasons why a TFSA is a bad idea (we’ll discuss this second one in our next tip).  A Tax Free Savings Account is NOT a good method for short term savings.

If you want to put $5,000 into your TFSA today, and then withdraw it two months from now, and then replace it four months from now, don’t contribute to a TFSA.  Here’s why:

You are permitted to contribute $5,000 per year.  If you put in $5,000, and tax it out, and then put it back in again, that counts as $10,000 in contributions.  If your limit is $5,000 per year, you have over-contributed by $5,000, and you will pay tax on that over contribution.  The government’s TFSA website explains this in more detail.

In summary, a TFSA is a great vehicle for long term savings, but is not as good for short term savings.  For short term savings, a savings account is a better alternative.

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