Sometimes consumers make bad investment choices and in the following points there are valid arguments to support the need to save.

The first thing that should be mentioned is that, for instance, a lot of studies in U.S. have proven that U.S. equity risk has a large idiosyncratic component due to lack of portfolio diversification skills (Goetzmann & Kumar, 2008). It means that they save but they do not save well because of the lack of knowledge.

The other point is that people are living a ‘credit card’ life while they, actually, have no money saved in personal accounts.

Of course, there is a need to encourage people to save. So, how can a person develop an investment strategy and how can a person make informed decisions concerning the right investment choices?

The Canadian federal government, in order to reverse the situation and help people save more, announced the introduction of a tax free savings account (TFSA). In the information below you can find some important features to think about the tax free savings account as an investment choice.

Let’s start with the TFSA model. So, the idea of a TFSA is rather simple – you pay income tax on your money and what is left after that may either be spent or put into a savings account or invested in stocks and mutual funds. If you decide to put your savings in the TFSA, eventually your money will grow due to capital gains, dividend, or interest and this income will not be taxed and you will have a big secure source of money after your retirement.

Now let’s talk about tax advantage. Just think about how much tax you pay now and compare it to what you will pay when you retire. Here it is necessary to mention that TFSA allows you to grow tax-free investment income (for example, capital gains, dividends and interest) earned on the contributions made using already taxed income.

Concerning contribution and withdrawal you should be aware of the following. Withdrawals from the account are tax-free and that is why they are popular. The balance contribution would be rolled over to the next year even in the case that you are unable to meet the golden contribution of 5000$ every year.

And, finally, let’s have a few words concerning relief from dealing with volatile markets. It will be useful for you to know that if your investment strategy is to consistently save small amounts over a period of time with a stable rate of interest you must consider opening a tax-free savings account because by doing so you are spared the pain of dealing with volatile stock markets. For those people who are investing in stocks and wish to diversify possibly the most conservative asset option is a tax free savings account.

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