Blessed by the Potato

There are a lot of questions and confusion about the TFSA out there, which I find surprising since to my mind it’s basically the most straight-forward tax-sheltered account the government has ever created. You put $5000 in. You get to invest in whatever you want (plain jane savings/GICs, stocks, bonds, mutual funds of same, even split it up and do a bit of each at different institutions as long as the total is < $5k/yr) and it grows tax-free. You can take it out whenever you want, tax-free. The next year, you get $5000 more room, and any room you didn’t use in prior years (or got back due to withdrawals). That’s about it.

But still, people have questions, so on the CMF I tried to explain it in a different way:

Think of the TFSA like rabbits in your backyard. The government is your parents at the front door. They say you can bring 5 bunnies into the backyard every year. Beyond that, they’re looking out at the front door, so they don’t care what happens in the backyard.

You can have your bunnies reproduce like, well, bunnies, you can put them all in one big pen or a bunch of different ones. It doesn’t matter, as long as no more than five ($5k in) bunnies goes past your parents per year.

If you need to take a bunny out for some reason, like to bring it to show and tell at school, your parents will remember you took that bunny out and will let you put it back in the next calendar year and not count it against your $5k limit per year – it’s not a new bunny. (recontribute withdrawals) Even if you did really well at bunny farming and want to bring all 40 of your bunnies to school with you, your parents will count them up and let you bring those back in the next year without counting against your new year’s limit of 5 bunnies.

If you don’t handle your bunnies well and they all die, your parents don’t want to hear about it, you can’t bring in any more bunnies.