The 2008 market crash got many of us to re-think our savings strategies. The introduction of the Tax-Free Savings Account (TFSA) in 2009 was timely, in the sense that it added another risk-free option for investors’ portfolios.

Optimizing the tax shelter

Though TFSAs can hold a variety of investment products, an overwhelming 94% of investors concentrate their TFSA with cash or money market funds. By foregoing equity funds, investors miss generating a higher return in their TFSA. A TFSA is an opportunity to produce non-taxable income. Unless TFSA money is needed in a short period, diversifying holdings to include equity funds allows for full usage of the tax shelter.

Not a traditional savings account

With contributions into a pension plan, members of the education community generally have lower RRSP contribution room. A TFSA is a viable option to invest retirement savings. Although contributions will not garner a tax deduction, they do provide a tax shelter. For grandparents who wish to give their grandchildren a head start in life, a TFSA can be a means to pass inheritance. A TFSA can be set up for a grandchild who is at least 18. Thereafter, assets can be transferred in.

Over-contribution issues

Another perk of a TFSA is that withdrawals can be made without penalty.Moreover, you can put back what you take out without affecting the annual $5,000 limit. For example, if you withdrew $2,000 in 2009, you can re-contribute it in 2010 on top of the annual $5,000 limit (re-contributions must be in the year  after the withdrawal). In 2010, $7,000 can be contributed. Changing the way you think about a TFSA ushers in a change in its use. Think about what your investment objectives are and chances are a TFSA can facilitate them.