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Since January 1, 2009, Canadians have been able to put their hard-earned money away into a new type of investment vehicle - the TFSA. The TFSA or Tax Free Savings Account has allowed Canadians to put away a set amount of money each year, usually between $5,000 and $6,000, into a completely tax-free account. But how does a TFSA differ from a regular savings account? Aside from the Tax-Free part of the title, there’s a few major differences that can help you attain your long-term financial goals. Here are 5 differences between a TFSA and a savings account. TFSA vs Savings Account1. TFSAs Can Be Used for Investments2. TFSAs have Contribution Limits3. You Cannot Spend from your TFSA4. You Pay Taxes on a Savings Account5. Minimum Age Requirement for Opening a TFSA 1. TFSAs Can Be Used for Investments Perhaps the most important difference between a TFSA and a regular savings account is the asset classes each can hold. A regular savings account is used purely to hold highly liquid funds, and in return you generate a (very) small interest rate. Essentially, a savings account can only really hold your cash and has very little potential or opportunity for long-term growth. On the other hand, a TFSA lets you invest in stocks, mutual funds, and ETFs, like any other investment account. The best part about this? Any capital gains, dividends, or interest you make in your TFSA continues to be tax-free. Theoretically, your principle can grow an infinite amount, as long as your contributions stay below your contribution limit. Many in the Canadian investing community therefore believe that the TFSA is actually mislabelled. When we see the words ‘savings account’ we automatically treat it as a place to store cash. Perhaps a more accurate name should be Tax-Free Investment Account. This would help Canadians get the most out of this awesome account! So that's the first big difference between a TFSA and a savings account. And in my opinion, it's one of the main reasons why a TFSA is worth investing in. Open a TFSA with Wealthsimple Invest Today ($25)Earn a $25 Bonus with Sign - Up Tax-Free investment incomeNo account minimum100% free to sign-upWealthsimple is designed for beginner investors Wealthsimple invests your money for youOpen a TFSA Today 2. TFSAs have Contribution Limits When things sound too good to be true, there is usually a catch! The catch with the TFSA is that each individual is capped by their contribution limit. Checking your TFSA limit is a pretty straight forward process, but unless you're shown how to do it, it's not obvious. https://www.youtube.com/watch?v=LNlAjCNpi-Q&t=1s On the other hand, with a regular savings account there is usually no limit to the amount of money you can deposit. And while you might think that's great, interest rates in a savings account are usually very low and you simply can't compare them to the potential gains you could generate from investing within your TFSA. In my article Can You Have More Than One TFSA Account, I talk about how your contribution limit can be spread across as many TFSA accounts as you wish. But the sum total of contributions must stay below your total contribution room given to you by the CRA. And remember, your capital gains and dividends can grow as much as possible, the original amount you contribute is the only amount that actually matters in regards to contributions. Failure to stay below the contribution limit will result in a 1% penalty of the over-contributed amount with every passing month. Related Financial Geek Article: How to Know If You Over-Contributed to Your TFSA? 3. You Cannot Spend from your TFSA Most people like keeping cash in their savings accounts so they can use a debit card to pay for things in a convenient matter. Unfortunately though, as of now anyways, there is no direct payment method linked to your TFSA, so you cannot pay for things directly from your TFSA. Why is this? Well, here’s where the ‘savings account’ wording might be best rephrased. Since you can keep your TFSA contributions in investment assets, these aren’t immediately available to use as a payment. So, you'll first need to sell off any investment assets you own, and then transfer those funds into a chequings or savings account before using it to directly pay for something. Even if you're simply holding your TFSA contributions as cash, you'll still need to make the transfer to your savings account. In this way, the TFSA is not a spending account and is therefore still at least one degree away from being able to be used at a merchant or online store. 4. You Pay Taxes on a Savings Account As I discuss in my article here, Canadians don't have to pay taxes on any income they generate within their TFSA. And despite what you may think about interest you generate in a savings account, that income is actually taxable. Wait, what? At first glance this probably reads contradictory to what we’re used to thinking. Pay tax on a savings account? Most of us probably don’t keep an amount large enough in our savings account to earn significant interest. But by law in Canada, we are supposed to declare any interest made on funds generated outside of a registered investment account like a TFSA or RRSP. The tax-rate on any interest earned up to about $48,535 is 15%. The kicker here is that most web-based income tax calculators like TurboTax will round to the nearest dollar. So if you make less than $0.49 in interest, it will likely be entered as $0.00 on your income tax. So whether you make interest on your savings account or not, this is a fundamental difference between a TFSA and a savings account. 5. Minimum Age Requirement for Opening a TFSA Another major difference between a TFSA and a savings account is the minimum age requirement. To open up a TFSA account at any financial institution, Canadians need to be at least 18 years of age to do so. A savings account can be opened by anyone regardless of their age. Most children’s savings accounts usually do not pay much interest. To open a TFSA account you also need to be a resident of Canada for tax purposes and have a valid Social Insurance Number. Anyone residing in Canada can open a savings account to deposit their money. If they are younger than 18, they do need a guardian to accompany them when opening the account. The Botton Line So there you have it. 5 key differences between a TFSA and a savings account. My recommendation would be to have both. What I love about a TFSA is that I can invest in assets like stocks and ETFs within it, but what I like about a savings account that a TFSA doesn't offer is fast liquidity. If I need to withdraw $3,000 from my savings account today, I can - no sweat. But because I do invest in securities within my TFSA, the same can't be said for when I want to withdraw funds. It usually takes anywhere from 3-4 business days to get the cash deposited into my bank account. But still! For the reasons I talk about in my article here, I think all Canadian's 18 years or older should have a TFSA. As always, thanks for reading folks! I really hope this article provided you with some value. Geek, out.