TFSAs differ from RRSPs in two significant ways:

• Interest on TFSA deposits is not taxable when withdrawn from the plan.
• Money deposited in the TFSA is not tax-deductible.

If you’re saving for retirement, a TFSA is not a common choice. However, you benefit if you are saving for other reasons, or you want to supplement your RRSP retirement savings with TFSA savings. You can also use a TFSA as security for a loan.

With TFSAs, you can designate a successor-holder of your TFSA accounts – a spouse or common-law partner – who will hold the account without affecting their contribution room for their own TFSAs. A designation of beneficiary other than a spouse or common-law partner is a provincial jurisdiction, and rules differ by province.

It’s important that your contributions don’t exceed the limit determined by federal legislation. You can have different TFSA accounts, but you’re responsible to make sure the total contributions don’t exceed the limit, which is $5000 in 2010. If you do go over the limit, there’s a 1% per month penalty until you withdraw the excess contributions, and your interest on the above-limit contributions is taxed.