How does a TFSA work? Where does the interest come from?
"A TFSA is a tax free savings account.  It is a type of account where you can buy various investments like stocks, bonds, or funds (mutual, exchange traded, and money market).  There are some other options but it's best to see what your bank or broker will allow. You probably specified the type of investment when you opened the account.  You can look at your statements or maybe online to see what you're invested in.  My guess is some kind of HISA (high interest savings account).  This is kind of the default option for banks. The government created these accounts for a variety of reasons.  The main stated reason was to encourage people to save.   Obviously they also do things to get votes.  There was an outcry after the change to a type of investment called ""investment trusts"".  This could be seen as a consolation prize.  These can be valuable to seniors for many reasons and they tend to vote more often.  There was also an election promise to eliminate capital gains taxes in some fashion. It's not profitable for the government, in fact it supposedly cost the federal government $410 million in 2013.  Banks make money by investing your deposit or by charging fees. You can see what every tax break 'costs' the government in lost revenue here http://www.fin.gc.ca/taxexp-depfisc/2013/taxexp1301-eng.asp#toc7" "As to where the interest comes from: The same place it comes from in other kinds of savings accounts. The bank takes the money you deposit and invests it elsewhere, traditionally by lending it out to others (hence the concept of a ""savings and loan"" bank). They make a profit as long as the interest they give for ""borrowing"" from you, plus the cost of administering the savings accounts and loans, is less than the interest they charge for lending to others. No, they don't have to pay you interest -- but if they didn't, you'd be likely to deposit your funds at another bank which did. Their ideal goal is to pay as little as possible without losing depositors, while charging as much as possible without losing borrowers. (yeah, I know, typo corrected) Why do they get higher interest rate than they pay you? Mostly because your deposits and interest are essentially guaranteed, whereas the folks they're lending to may be late paying or default on those loans. As with any kind of investment, higher return requires more work and/or higher risk, plus (ususally) larger reserves so you can afford to ride out any losses that do occur."
It's not compound interest. It is internal rate of return.  If you have access to Excel look up the XIRR built-in function. "Q: How do currency markets work? A: The FX (foreign exchange) market works very much like the stock market where potential buying parties bid $Y of country 1's currency to buy $1 in country 2's currency.  Potential selling parties sell (ask) $1 of country 2's currency for $Y of country 1's currency.  Like the stock market, there are also a swaps, futures and options in this market. Q: What factors are behind why currencies go up or down? A: Just like any open market, currencies go up and down based on supply and demand.  Many factors affect the supply and demand of a particular currency.  Some were listed well by the other posts. Q: What roles do governments, central banks, institutions, and traders have in the process? A: It's common practice that gov'ts intervene to ""control"" the value of currencies.  For example, although it's not general public knowledge, the Canadian gov't is actively purchasing up US dollars in the FX market in an effort to stop the US/Canadian exchange rate from dropping further.  This has dramatic economic consequences for the Canadian ecomony if the Canadian dollar were to strengthen too far and too quickly." What is much more likely is immediate or close to immediate investment.  but this is exactly my point of contention with how they do things. I know for a fact that the money is immediately invested, which is why i find it wrong that interest for money collected in a given financial year is announced after the end of the next financial year.  i was wondering if this was a common practice in other countries. "You do not have to pay tax on any earnings inside a TFSA. Quoting Wikipedia's article, ""Investment income, including capital gains and dividends, earned in a TFSA is not taxed, even when withdrawn."" This is backed up by the official TFSA government site, http://www.tfsa.gc.ca/, which states, ""Investment income earned in a TFSA is tax-free."" This makes the TFSA an appropriate vehicle to store investments which produce dividends. For example, if you invest $5500 and receive a total of $500 in dividends this year, you will not pay tax on that $500, either in this tax year or even subsequently, when you withdraw money out of your TFSA. Of course, TFSAs aren't meant to be used for regular withdrawals. If you are planning on investing $5500 this year and withdrawing the dividends, I'd urge you to be careful and consider if this is actually the best sort of savings vehicle for you. But that's really just a general warning, nothing specific to dividends. It is possible to do this. Indeed, withdrawing $500 in dividends this year will increase your available contribution room in the next tax year (not in this tax year). For example, you contribute $5500 at the beginning of this year. By the end of November, you have accumulated $500 in dividends. You withdraw these in December. In the following tax year, you can recontribute this $500 in addition to the standard $5500 contribution room. So, you could contribute $6000. Just be careful with your calculations; I messed mine up and ended up paying a rather substantial penalty for my overcontribution." When you get a loan (car, home, student) the lending company (bank) give the (auto dealer, previous home owner, school) money. You as the borrow promise to pay this money back with interest.  So in your case the 100,000 you borrow requires a payment for principal and interest of ~965 per month. After 240 payments you will have paid the bank ~231,605.  So who got the ~131,000 in interest. The bank did. It was used to pay interest to the people who made deposits into the bank. It was also used to pay the expenses of the bank: salaries, retirement, rent, electricity, computers, etc. If the bank is a company with investors they may have to pay dividends to them to.  Of course not all loans are successfully paid back, so some of the payment goes to cover the loans that are in default. In many cases loans are also refinanced, or the house is sold long before the 20-30 year term is up. In these cases the amount of interest received for that loan is much less than anticipated, but the good news is that it can be loaned out again. "First note that CIBC issued these bonds with a zero coupon, so they do not pay any interest.  They were purchased by the market participants at a small premium, paying an average of 100.054 for a nominal value of 100.  This equates to a negative annual ""redemption"" yield of 0.009% - i.e., if held until maturity, then the holder will witness a negative annual return of 0.009%. You ask ""why does this make sense?"".  Clearly it makes no sense for a private individual to purchase these bonds since they will be better off simply holding cash.  To understand why there is a demand for these bonds we need to look elsewhere. The European bond market is currently suffering a dwindling supply owing to the ECBs bond buying programme (i.e., quantitative easing).  The ECB is purchasing EUR 80 billion per month of Eurozone sovereign debt.  This means that the quantity of high grade bonds available for purchase is shrinking fast. Against this backdrop we have all of those European institutions and financial corporations who are legally obliged to purchase bonds to be held as assets against their obligations.  These are mostly national and private pension funds as well as insurance companies and fund managers.   In this sort of environment, the price of high quality bonds is quickly bid up to the point where we see negative yields. In this environment companies like CIBC can borrow by issuing bonds with a zero coupon and the market is willing to pay a small premium over their nominal value. TL/DR The situation is further complicated by the subdued inflation outlook for the Eurozone, with a very real possibility of deflation.  Should a prolonged period of deflation materialise, then negative redemption yield bonds may provide a positive real return." It has to do with return. I don't know if Canada has a matching feature on retirement accounts, but in the US many companies will match the first X% you put in. So for me, my first $5000 or so is matched 100%. I'll take that match over paying down any debt. Beyond that, of course it's a simple matter of rate of return. Why save in the bank at 2% when you owe at 10-18%?  One can make this as simple or convoluted as they like. My mortgage is a tax deduction so my 5% mortgage costs me 3.6%. I've continued to invest rather than pay the mortgage too early, as my retirement account is with pre-tax dollars. So $72 will put $100 in that account. Even in this last decade, bad as it was, I got more than 3.6% return. The point of an RRSP is that you can put money in when you are paying a lot of taxes (maybe a 50% marginal rate) and take it out later when you are paying less taxes (maybe a 30% marginal rate.) You will thus end up with more money. Since you are not paying high taxes on your modest income, this aspect of an RRSP doesn't really apply to you. When the time comes that you start withdrawing from your RRSP, you will pay taxes on the entire withdrawal, both principal and interest. A TFSA on the other hand allows withdrawals (typically limited to some small number a year) without the principal or the interest being considered taxable income. That seems like a better approach for you. However, they are not very liquid - you can't deposit, withdraw, deposit, withdraw week after week. Look around for not-exactly-banks that offer higher interest rates than the banks do. Set up a TFSA with one, and put about 8k in it. (If you have time to investigate GICs, ETFs, and whatnot, fine, investigate that for a while and set up a TFSA that holds those.) Put the other 2k in a high-interest savings account from that institution. High interest will be between 1 and 2% which isn't very high, but oh well. Assuming you get some notice when you need to replace your car, you could withdraw from the TFSA to get that money. Or you might be lucky and need a car at a terrible time for dealers to sell cars, and get a great deal on a new car with a long warranty, something you could keep for another 15 or 20 years. If you could afford the loan payment then your savings could stick around for a rainier day. "As user quid states in his answer, all you need to do is open an account with a stock broker in order to gain access to the world's stock markets.  If you are currently banking with one of the six big bank, then they will offer stockbroking services.  You can shop around for the best commission rates.  If you wish to manage your own investments, then you will open a ""self-directed"" account.  You can shelter your investments from all taxation by opening a TFSA account with your stock broker.  Currently, you can add $5,500 per year to your TFSA.  Unused allowances from previous years can still be used.  Thus, if you have not yet made any TFSA contributions, you can add upto $46,500 to your TFSA and enjoy the benefits of tax free investing. Investing in what you are calling ""unmanaged index funds"" means investing in ETFs (Exchange Traded Funds). Once you have opened your account you can invest in any ETFs traded on the stock markets accessible through your stock broker. Buying shares on foreign markets may carry higher commission rates, but for the US markets commissions are generally the same as they are for Canadian markets.  However, in the case of buying foreign shares you will carry the extra cost and risk of selling Canadian dollars and buying foreign currency.  There are also issues to do with foreign withholding taxes when you trade foreign shares directly.   In the case of the US, you will also need to register with the US tax authorities.  Foreign withholding taxes payable are generally treated as a tax credit with respect to Canadian taxation, so you will not be double taxed. In today's market, for most investors there is generally no need to invest directly in foreign market indices since you can do so indirectly on the Toronto stock market.  The large Canadian ETF providers offer a wide range of US, European, Asian, and Global ETFs as well as Canadian ETFs.  For example, you can track all of the major US indices by trading in Toronto in Canadian dollars.  The S&P500, the Dow Jones, and the NASDAQ100 are offered in both ""currency hedged"" and ""unhedged"" forms.  In addition, there are ETFs on the total US Market, US Small Caps, US sectors such as banks, and more exotic ETFs such as those offering ""covered call"" strategies and ""put write"" strategies. Here is a link to the BMO ETF website. Here is a link to the iShares (Canada) ETF website." You don't pay any interest until a few weeks after you receive your statement, when the payment is due. Simply set up a direct debit with Halifax for the statement balance and they will take the correct amount (whatever you spent that month) from your bank account on the payment due date. Problem solved! "Note - this is a complicated topic. I've read the rules multiple times and I'm still not sure I understand them perfectly. So please take this with a pinch of salt and read the rules for yourself. The time(s) at which a test is done against the LTA are known as a ""Benefit Crystallization Event"" (BCE). There are 13 of these (!) - they're numbered 1-9 with the addition of some extras numbered 5A-D. However, the most important ones for those with defined contribution pensions are: Broadly, the idea is that a BCE occurs when you start taking money out of your pension, and when you reach age 75. Each time one happens, the amount you are taking out (""crystallizing"") gets compared against the LTA and a certain percentage of your LTA gets designated as being used. Crystallising doesn't necessarily mean you actually receive the money immediately, just that some of your money is switched into a mode where you can start receiving it in different ways. The rules are designed to avoid double counting, so broadly anything that was taken off your LTA won't be taken off a second time. The cumulative use of your LTA is tracked as a percentage rather than an absolute amount, to take account of any changes in the LTA between the different times you crystallise money. For example if you crystallise £100K when the LTA is £1mn, that's 10% of your LTA gone. If later on the LTA has risen to £1.1mn and you take out £110K, that's another 10%. Once you hit 100%, you start paying a LTA charge on any excess. The really simple path here is if you just get an annuity with your entire pot, before hitting age 75 (and you don't make any further pension contributions after). Then only BCE 4 applies: your pension pot, all of which is being used to buy the annuity, is compared with the LTA. After this point your entire pension pot is considered to be crystallized, so no more BCEs will apply - the tests at age 75 only apply if you still have money that you haven't taken out or used to buy an annuity. The annuity payments themselves will be subject to income tax at your normal rate at the time you receive them, i.e. 0%, 20%, 40% or 45% depending on how much other income you have. In reality most people would want to take 25% of their pot as a lump sum at the same time as buying an annuity, given that it's tax-free if you're under the LTA. At this point BCE 6 applies in addition to BCE 4, but again the overall effect of the test is pretty simple, look at the total pension pot (lump sum + cost of annuity), and if it's under the LTA you're fine. Again, at this point no more BCEs will apply as all the money is considered to have been fully distributed. If you only use part of the money for an annuity/lump sum, then only that part of the money is compared against the LTA, and the rest stays in your pension and will be compared later. The 25% limit for a tax-free lump sum applies to the total you are taking out at that point: if you have £200K and are taking out £100K, you can take out £25K as a tax-free lump sum and use £75K for the annuity. The other £100K stays in your pension. Many people see annuity rates as very low and will want to take on more risk (and reward) by using ""Drawdown"" for at least part of their pension. Essentially, you can designate part of your pension for drawdown, and at that point BCE 1 applies to the money you designate. Once designated, you can start drawing the money out as income, which will be taxed at your normal income tax rate at the time you receive it. Again, you can take 25% as a lump sum at this point which will be subject to BCE 6. There's also an alternative route where you put everything into ""flexi-access drawdown"" without taking any lump sum immediately, and then as you actually withdraw income, 25% is tax-free and the rest is taxed as income. The overall effect is the same, but it gives you more control over when you get the tax-free bit. However, because with drawdown you can actually leave the money in your pension and growing tax-free, there's a further test against the LTA at age 75 under BCE 5A. To avoid double-counting (""prevention of overlap""), the amount left in the drawdown fund at that point is reduced by whatever was previously tested against BCE 1. So if you put £150K into drawdown initially, and it's grown to £200K by age 75, then another £50K will crystallise under BCE 5A. I think that if you put £150K into drawdown initially and it grows by £50K, but you take that out as income so that only £150K (or less) remains at age 75, then the amount crystallising under BCE 5A is nil. Also, when money is in drawdown, you can choose to use it to buy an annuity. BCE 4 is applied at this point (if before age 75), but as with BCE 5A, this is reduced by anything that was previously crystallised under BCE 1. If you only use some of it to buy an annuity, the reduction is pro-rataed, e.g. if you started out with £150K moved into drawdown, and later it has grown to £200K and you use £100K to buy an annuity, then the reduction is £75K so £25K is considered to have crystallised under BCE 4. Once you reach age 75, as well as any money that's still in drawdown, anything you haven't yet crystallised at all gets tested against the LTA under BCE 5B. Broadly, once you go over the LTA, the charges are simple: There's never any explanation given for these two rates, but I think it's all based on trying to at least cancel out the benefit you got from using your pension, on the assumption that: So with the 25% charge + 20% income tax, if you take out £100, you'll end up with £75 gross income, so £60 net income - just the same as if you'd originally paid 40% tax. (This ignores the effect of investment growth, but if you would have saved the £60 in an ISA, the end result is the same: if you had growth of say 50% over the time the money was in your pension, it'll be the same effect if you had £100 growing to £150 and now received 60% of it, or if you had £60 growing to £90 untaxed in an ISA.) The 55% lump sum charge is in case you are paying 40% tax when you take it out, to make sure that it's not a more attractive option than the 25%+income tax: if you have £100, either you get £45 tax free via a lump sum, or you get £75 gross and hence £45 net. I haven't covered lots of cases here: defined benefit pensions. Roughly, when you start receiving the pension, 20x the initial income from the pension is deemed to crystallise under BCE 2 and any lump sum you receive crystallises under BCE 6. In the former case, you could end up having to pay the LTA charge with money you haven't actually got yet, and you can ask the pension administrator to instead reduce your pension to pay it. However, there are lots of special cases for defined benefit pensions, mostly for historical reasons, so you should make sure you check with your pension administrator about this. if you die before age 75, at which point the LTA test is applied via either BCE 5C/5D, or BCE 7. After paying the LTA charge if any, your dependents or whoever else you leave it to gets the remainder tax-free. transferring overseas (BCE 8). ""scheme pensions"" under BCE 2 and BCE 3 (I think these are relatively uncommon) some corner cases covered by regulations (BCE 9)" Given you other question and your resulting marginal tax rate, you may want to optimize where you hold each type of security.  If you still plan to have a regular investment account, it's hard to beat the low tax rate of Canadian dividends. In a TFSA, you won't pay tax on the dividend income, and you won't get a dividend tax credit either.  For some people in BC this actually costs them money as they have negative marginal dividend tax rates.  For you it seems to be 6%. Contrast this with any other holding in your regular account, interest at full marginal rates, and cap gains at half that.  Dividends still win in a regular account. "@sdg's answer is spot-on with the advice to avoid repeated conversions, but I'd like to provide some specifics on the fees involved: Each time you round-trip Canadian dollars (CAD) through a U.S.-dollar (USD) priced security at TD Waterhouse and leave your proceeds in CAD, you're paying a total foreign exchange fee – implied in their rate  spread – of about 3%, give or take. That's ~3% per buy & sell combination, or ~1.5% on each end. You can imagine if you trade back & forth frequently, you can quickly lose a lot of money.  Do it back and forth ten times in a year and you're out ~30% on the fees alone! The TD U.S. Money Market Fund (TDB166) that TD Waterhouse is referring to has no direct commission to buy or sell, but it does have a Management Expense Ratio (MER) of 0.20% per year – basically a fee which is deducted from the fund's returns (which, today, are also close to zero.)  Practically speaking, that's a very slim fee to hold some USD in your Canadian dollar TFSA. While 0.20% is cheap, a point to keep in mind is if you maintain a significant USD balance, you are maintaining currency risk:  You can lose money in CAD terms if the CAD appreciates vs. USD. Additional references: Canadian Capitalist describes TD Waterhouse and the use of TDB166 and ""wash trades"" at How to ""Wash"" Your Trade?  He's referring to RRSPs, but the same applies to TFSAs, which came out after the post was written. Canadian Couch Potato has two relevant articles: Are US-listed ETFs Really Cheaper? and Lowering Your Currency Exchange Fees." "You definitely do want to avoid losing money on repeated currency conversions.  Remember they are making a profit every time you change your currency. A money market fund is basically like a 'savings account' mutual fund.  They are open like mutual funds, in that you can buy or sell at any time.  There don't tend to be fees of any kind (directly) as all management is paid for out of the interest/returns that the fund generates. So using a money market fund to hold the ""cash"" portion of your TFSA or any other account for that matter would be a normal (and ""free"") thing to do. Good Luck" "There are a couple of misconceptions I think are present here: Firstly, when people say ""interest"", usually that implies a lower-risk investment, like a government bond or a money market fund. Some interest-earning investments can be higher risk (like junk bonds offered by near-bankrupt companies), but for the most part, stocks are higher risk. With higher risk comes higher reward, but obviously also the chance for a bad year. A ""bad year"" can mean your fund actually goes down in value, because the companies you are invested in do poorly. So calling all value increases ""interest"" is not the correct way to think about things. Secondly, remember that ""Roth IRA fund"" doesn't really tell you what's ""inside"" it. You could set up your fund to include only low-risk interest earning investments, or higher risk foreign stocks. From what you've said, your fund is a ""target retirement date""-type fund. This typically means that it is a mix of stocks and bonds, weighted higher to bonds if you are older (on the theory of minimizing risk near retirement), and higher to stocks if you are younger (on the theory of accepting risk for higher average returns when you have time to overcome losses). What this means is that assuming you're young and the fund you have is typical, you probably have ~50%+ of your money invested in stocks. Stocks don't pay interest, they give you value in two ways: they pay you dividends, and the companies that they are a share of increase in value (remember that a stock is literally a small % ownership of the company). So the value increase you see as the increase due to the increase in the mutual fund's share price, is part of the total ""interest"" amount you were expecting. Finally, if you are reading about ""standard growth"" of an account using a given amount of contributions, someone somewhere is making an assumption about how much ""growth"" actually happens. Either you entered a number in the calculator (""How much do you expect growth to be per year?"") or it made an assumption by default (probably something like 7% growth per year - I haven't checked the math on your number to see what the growth rate they used was). These types of assumptions can be helpful for general retirement planning, but they are not ""rules"" that your investments are required by law to follow. If you invest in something with risk, your return may be less than expected."