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Rob Carrick

Enough with the ill-informed trash talking about tax-free savings accounts.

Here's one complaint I hear a lot: TFSAs are a waste of time because interest rates on bank savings accounts are so low. People ask, what's the big deal about avoiding tax on gains of 1 to 2 per cent, especially when inflation is running even or just ahead of these rates?

Five years after the introduction of the TFSA, it's still worth making this crucial point: You can put just about any type of savings vehicle or investment into one of these accounts. They need not be based on savings accounts.

Many people have put TFSA money into high-interest savings accounts at a big bank or one of their online competitors. In fact, these banks are aggressive in trying to build their TFSA business – that's why some of them keep offering temporary teaser rates in the 2 to 3 per cent range. TFSA savings accounts make sense in situations like:

• You have a sizeable emergency fund and want to maximize after-tax gains while maintaining absolute safety.

• You're saving for a down payment on a house you plan to buy in the next few years.

• The mandatory withdrawals from your registered retirement income fund leave you with extra cash and you want to keep it safe for surprise expenses in the near to medium term.

If you have a long-term horizon for the money in your TFSA, say five years plus, then consider a diversified mix of investments like exchange-traded funds, mutual funds and stocks. Every online broker offers a self-directed TFSA account, usually with zero annual administration fees. People seem to have a good understanding that they can invest in a wide range of things in their self-directed registered retirement savings plans. It's just the same with TFSAs.

I also hear people say they're done with TFSAs because they've inadvertently broken the rules covering the re-contribution of money they withdrew from their account. CRA will notify you of pending penalties if you make an over-contribution. If you write and say you made an honest error and have removed the over-contribution amount, then the penalties will likely be voided. Moreover, the over-contribution rules aren't that complex. A simple way to avoid them: If you withdraw money from a TFSA, do not replace it until the next calendar year. For more details, check out a recent column I wrote on this topic.

Stop trashing TFSAs because of misunderstandings about how they work. Truth is, they're as close to a universally good financial vehicle as we have in this country.

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